"Greater Than 80%" and "At Least 80%": A Drafting Case Study

An operating agreement at issue in litigation now pending in a state district court contains two provisions addressing the same act, dissolution of the company, and the two provisions do not agree with each other. They set different approval thresholds, and they measure those thresholds against two different defined terms. This article examines that drafting problem and no other aspect of the case.

Scope. Entity and member names have been changed and the operative dates omitted, as a courtesy to the parties and their counsel in a matter that remains pending. Section numbers, quoted language, and the membership percentages are as they appear in the filed documents. I do not know all of the facts, and I do not have all of the documents in the case. I have never represented, and do not represent, any party to this litigation. I express no view on which party should prevail on any claim, on how the court should read either provision, or on the likely outcome of the case. Nothing here characterizes the conduct of any party or of any lawyer.

The agreement and the members

Meridian Construction, LLC operates under a second amended and restated operating agreement. The company is manager-managed, and the manager is one of its members, Ironwood Mechanical, LLC.

Exhibit A to the agreement sets out four members and their membership interests: Ironwood Mechanical at 50 percent, Alder Ventures, LLC at 20 percent, Beacon Ventures, LLC at 20 percent, and a fourth member at 10 percent.

Three of the four members later signed a wind-down agreement approving dissolution of the company. The holder of the remaining 20 percent interest was not a party to that agreement and sued. Whether the three signing members held enough to approve dissolution depends on which provision of the operating agreement supplies the threshold.

The two dissolution provisions

Article VII of the operating agreement provides:

Section 7.1 Dissolution. The Company shall be dissolved upon the occurrence of the following event (hereinafter, a “Liquidation Event”): the consent of Members holding greater than 80% of the outstanding Membership Interests to dissolve the Company.

Article V provides:

Section 5.6 Fundamental Transaction Approval. The Manager may not take the following actions without the approval of at least eighty percent (80%) of the Members: (a) Sell more than 20% of the assets of the Company in one or a series of related transactions, other than in the ordinary course of business; (b) Dissolve the Company; or (c) Sell, merge or consolidate the Company with another entity.

Both provisions address dissolution. One requires consent of holders of greater than 80 percent. The other requires approval of at least 80 percent.

Each 20 percent holder can prevent dissolution under Section 7.1 and cannot prevent it under Section 5.6. The manager holds 50 percent and the other three members hold 20, 20, and 10 percent. Section 5.6, requiring at least 80 percent, is satisfied by the manager together with any two of the other three members. Section 7.1, requiring more than 80 percent, is satisfied only by the manager together with both 20 percent members. The choice between “greater than” and “at least” is what separates those two outcomes.

The defined terms

The two provisions also count different things, and Article I of the agreement defines both of them:

“Member” means each owner of Membership Interests in the Company. Each Member’s name is set forth in the attached Exhibit A, along with the Membership Interests owned by such Member.

“Membership Interest” means measures of ownership in the Company. The capital structure of the Company shall consist of one class of Membership Interests.

By those definitions, a Member is an owner and a Membership Interest is a measure of ownership. Section 7.1 requires the consent of “Members holding greater than 80% of the outstanding Membership Interests,” which takes its percentage of the measures of ownership. Section 5.6 requires the approval of “at least eighty percent (80%) of the Members,” which takes its percentage of the owners. The company has four Members, and 80 percent of four Members is 3.2 Members.

The wind-down agreement illustrates the consequence. Its recitals identify Section 5.6 by number as the governing provision and quote its “at least eighty percent (80%) of the Members” language. The operative paragraph then reads:

Thereafter, the parties hereto, representing 80% of all the Membership Interests in [Meridian Construction], hereby approve without any further approvals or consents, that [Meridian Construction] shall be dissolved in accordance with the Operating Agreement … .

The document uses the formulation “80% of all the Membership Interests” three separate times, in the recitals, in the operative paragraph quoted above, and again in a ratification paragraph. Having invoked the provision that counts Members, it measured the approval in Membership Interests instead. Three of four Members is 75 percent of the Members.

The briefing on the motions to dismiss does not address the distinction. Both moving defendants quote Section 5.6 accurately, including the phrase “of the Members,” and then describe the threshold in terms of membership interests. The plaintiff’s responses argue which section governs and do not raise the defined terms. Neither reply brief takes the point up. The defined-term question is therefore a drafting observation rather than an issue the litigation has framed.

Alright, so how do you draft something like this?

Pick the intent first, then the language. Three common intents:

1. Any combination of Members holding X percent, but no one acting alone.

…the prior written consent of Members holding not less than eighty percent (80%) of the outstanding Membership Interests, given by not fewer than two Members that are not Affiliates of one another.

2. A specific member, plus X percent of the rest.

…the prior written consent of (a) the holders of a majority of the Class A Membership Interests and (b) Members holding not less than sixty percent (60%) of the outstanding Membership Interests held by all Members other than the Class A Members.

Identify the required member by class rather than by name. A named consent lapses when that member transfers its interest; a class designation travels with the units.

3. X percent, regardless of who holds it.

…the prior written consent of Members holding not less than eighty percent (80%) of the outstanding Membership Interests.

Two points apply to all three. Use “not less than” rather than “greater than,” so that the number stated in the provision is itself sufficient. And measure in Membership Interests rather than Members, because a percentage of the Members counts owners, which is how Section 5.6 came to ask for 3.2 of them.

The bottom line

Three checks would have surfaced both problems before signature, and all three are inexpensive.

Put dissolution in one section and point everything else to it. Where two articles of the same agreement address the same act on different terms, the provisions can be reconciled only by construction. If a covenant restricting the manager needs to address dissolution, it should cross-reference the dissolution section rather than restate the threshold in its own words.

Write out every voting combination and confirm the numbers are consistent. With four holders at 50, 20, 20, and 10 percent, the full set of possible coalitions is short enough to list on one page. Listing them identifies which members can block which actions, and it shows immediately when two provisions covering the same act produce different blocking rights.

Check the defined terms against the arithmetic. Member and Membership Interest are separately defined in this agreement, the first as an owner and the second as a measure of ownership, and they are not interchangeable. A threshold expressed as a percentage of a defined term should be tested by taking that percentage of the actual number of the thing defined, and the result should be a number the agreement can use.

Note on sources

The provisions quoted above are taken from the operating agreement and the wind-down agreement filed as exhibits to the petition in a case now pending in a state district court, and from the parties’ briefs on the motions to dismiss in that case. Entity and member names have been changed and dates omitted. Section numbers, quoted language, and the membership percentages are as they appear in the filed documents.