The food import sector is an interesting and complex area of business, not only because of the perishable nature of much of the product that is traded, but also because it is a rapidly evolving and growing place to make money. Bigfood blue white is one of the newer brands bringing consumers all kinds of imported food – from frozen produce to seafood that needs to travel well and be able to withstand a sudden temperature change in transit. Like many companies that were born out of almost nothing, this privately held, relatively small corporate entity was formed by several partners who built it into a marketable brand. Today, Bigfood blue white provides price competitive, high-quality food imports to restaurants and other wholesale establishments that serve hundreds of thousands of customers each day. In furtherance of this goal, several months ago, Bigfood blue white decided to expand its offering and import a new seafood line from South Africa. Without going too deeply into the particulars of the situation, when Bigfood blue white made its decision to import food from South Africa, it first needed to deal with a regulatory issue. As part of the import, it would need to obtain a license to import from the Ministry of Health. For purposes of this article, let’s say it took both time and money (meaning that it was costly to bigfood blue white as revenue was lost while it waited on permit approval and testing) to obtain this license.
While it was waiting for the permit, bigfood blue white entered into an arrangement with an American based 3rd party supplier who promised to manufacture the products, package them appropriately and hold them until they were ready for importation. This helped bigfood blue white mitigate some of the timing risks involved in the importation. With regards to the money aspect of the venture, on the other hand, bigfood blue white sought financing specifically to purchase the seafood being imported. The transaction was successful on many levels and bigfood blue white’s new product line took off in more ways than one. However, bigfood blue white made one major mistake. Its operating agreement and bylaws did not clearly reflect the fact that one of the shareholders had made an investment in debt in bigfood blue white. In other words, bigfood blue white had forgotten to address whether there would be interest payments because the magnitude of the shareholder’s investment in the company made it necessary treat the shareholder like a lender (which it was). When it came time to pay the various stakeholders what they had earned, bigfood blue white paid the other partners and the 3rd party supplier, but didn’t pay the investor into bigfood blue white a cent.
Like most operating agreements, this agreement was structured to provide payments to the various parties based on gross revenues. Therefore, the client (bigfood blue white) believed that it was not required to make any payments to its shareholder/investor until bigfood blue white was cash flow positive. It even considered itself under no legal obligation to make any payments to its investor because the operating agreement did not provide for payments other than those based on gross revenues. Unfortunately for bigfood blue white, its investor filed suit as soon as it learned about bigfood blue white’s reluctance to pay. The good news for bigfood blue white is that it isn’t worse than it is. This is due to the fact that bigfood blue white’s investor is a financially savvy individual who understands the intricacies of corporate law. This investor’s strategy seeks to force bigfood blue white to repay him first, both because he is the only one bigfood blue white failed to pay under the operating agreement due to non-negotiated profit-sharing percentages.
Furthermore, to make matters worse, this plaintiff has filed suit against the shareholders of bigfood blue white personally. She claims that bigfood blue white was insolvent on or shortly before bigfood blue white made the last payment to its shareholders. We will not go into the intricacies of this argument or the fact that it has no merit. Instead, the focus here is that if bigfood blue white had taken the time to properly negotiate an operating agreement that not only adequately accounted for the parties’ contributions, but also provided a plan for paying dividends to investors, rather than stakeholders, when they are owed, this issue would have been avoided.
Operating agreements and bylaws can be as simple or complex as the creator wants. At their essence, these agreements set forth the rules by which various corporate stakeholders operate. These types of documents are useful to owners of both public and private corporations because they provide a blueprint for how an entity acts. For a private entity with several investors and stakeholders like bigfood blue white, operating agreements can be tailored to meet the specific needs of that company. In bigfood blue white’s situation, the partners could have established how they would allocate income or profit from their food import transactions. It could have addressed how bigfood blue white would address sales to specific clients, like say the factory in South Africa manufacturing its new seafood product line.
An operating agreement is a legal representation of the parties’ intent. It shows how the parties wanted and intended to operate. As stated above, bylaws provide similar protections. In the case of bigfood blue white, however, it really needed a well thought out bylaws to provide for decision-making among various owners and officers. Since large corporations routinely face many issues, bigfood blue white could have used bylaws to become a decision-maker that guided the actions of the company. A well written set of bylaws would have clearly established how to handle the specific events to which bigfood blue white was subject. Instead, it reacted as best as it could to a poorly structured operating agreement.
One of the most important decisions anyone can make is how to structure a company’s operating agreement and bylaws. These documents not only control the relationship between the company and its stakeholders, but they also control the larger risk factors associated with running a business. In bigfood blue white’s case, it tried to move too quickly and put itself at risk in two ways. Without a clear operating agreement, it has left itself open to lawsuits from its shareholders and investors. Without bylaws, it cannot even control who makes decisions internally and adopts doctrine to protect itself. While the situation with bigfood blue white is for illustrative purposes only, one lesson should be clear. It is not just enough to understand the general differences between an operating agreement and bylaws. Companies need to ensure that they write specifically tailored documents that reflect their business models and how those companies plan on resolving conflicts. This is especially true for food import businesses that can be subject to lots of regulations or need to manage complicated logistics.
For more information on corporate governance, you can visit Wikipedia.