The Operating Agreement and the Side Letter

Question 50: The Operating Agreement and the Side Letter

Your role

Prepare a neutral analysis for the two 50 percent members of Lattice Harbor LLC, a fictional technology company. Mara Quill and Julian Senn are deadlocked over appointment of a senior officer and a financing. The operating agreement and a signed side letter allocate authority differently.

Governing law

Assume the following rules of the fictional State of Torren apply:

1. An LLC operating agreement governs member and manager authority. A later or contemporaneous instrument may modify it only in the manner the operating agreement permits.

2. Lattice Harbor's operating agreement states: "An amendment or incorporated side agreement is effective only if signed by both Members and either labeled an amendment or listed in Schedule 4. For any matter expressly covered by an incorporated side agreement, that agreement controls over a conflicting general provision of this Operating Agreement."

3. A signed instrument that satisfies rule 2 is interpreted with the operating agreement. A specific allocation controls over a general joint-approval rule, but only within the specific allocation's text and duration.

4. A separate contract that does not satisfy rule 2 may create damages or other contractual rights but does not alter LLC voting authority.

5. Apparent authority cannot arise from one manager's private assertion when the counterparty knows the operating documents require joint approval.

6. Waiver of a joint-approval requirement requires clear, knowing conduct concerning the same type of transaction. Failure to object to unrelated unilateral decisions is insufficient.

7. Deadlock remedies under the agreement require written notice, a five-business-day executive meeting, and mediation before either member may seek judicial dissolution. A court should prefer a contractual tie-break or narrow declaration when the business remains viable.

8. A member must act in good faith and may not lock the other out of records, divert company opportunities, or manufacture deadlock to force a discounted buyout.

Documents and facts

The operating agreement, signed by Mara and Julian, provides:

• Both members must approve any officer appointment with annual compensation above $250,000.
• Both must approve debt above $500,000, any equity issuance, annual budgets, and removal of the chief executive.
• Mara serves as chief executive and manages ordinary operations within the approved budget.
• Amendments and incorporated side agreements follow the rule 2 language above.

Schedule 4 lists one document: "Founder Authority Side Letter dated the same date as this Agreement."

The side letter is signed by both members and states:

"Notwithstanding any contrary general provision of the Operating Agreement, during the first 24 months after formation Mara has final authority over product strategy and hiring for product leadership. Julian has final authority over finance operations and fundraising preparation. Any issuance of equity or debt, and any removal of the chief executive, remains subject to the express joint-approval provisions of the Operating Agreement."

The present dispute occurs in month 18.

Mara wants to appoint Rhea Sol as "Chief Product and Revenue Officer" at $285,000. The job description allocates approximately 65 percent of duties to product strategy and product-team leadership, 25 percent to sales coordination, and 10 percent to pricing analytics. Julian objects that any officer above $250,000 requires joint approval and that revenue work makes the role outside "product leadership."

Julian wants Lattice Harbor to sign a $1.2 million secured bridge loan. He argues that his final authority over "fundraising preparation" permits him to sign. The lender has received the operating agreement and side letter and knows Mara objects.

Mara previously hired two product directors below $250,000 without Julian's approval. Julian previously selected an accounting platform and investment bank without Mara's approval. Neither member objected. No prior officer above $250,000 or debt above $500,000 was approved unilaterally.

Julian has threatened to block Mara's access to financial dashboards. Mara has threatened to direct the company's bank not to honor Julian's expense approvals. The business remains solvent and has eight months of cash without the bridge loan.

Assignment

Analyze neutrally:

• Which document controls when its specific terms conflict with the operating agreement's general terms.
• Whether the side letter was validly incorporated.
• The strongest argument on each side concerning the Chief Product and Revenue Officer role.
• Whether either member may appoint Rhea unilaterally on the present record.
• Whether Julian may sign the $1.2 million bridge loan unilaterally.
• Apparent authority as to the informed lender.
• Whether prior conduct waived any approval requirement.
• The required deadlock process and available narrow remedies.
• Immediate governance steps that preserve records, operations, and financing options without a lockout or unauthorized commitment.
• The concrete decision path for the appointment and loan.

Q50 key (Operating Agreement and Side Letter)

1. The side letter is validly incorporated because both members signed it and Schedule 4 lists it. Under the express hierarchy, its specific covered allocations control over conflicting general provisions during 24 months. Missed: the side letter is treated as either irrelevant or unlimited.
2. Mara has a strong argument that a role devoted 65 percent to product strategy and product leadership is "product leadership" and within her final hiring authority. Julian has a substantial argument that the combined revenue title and $285,000 officer status invoke the joint officer rule outside the specific allocation. The supplied text does not eliminate that scope dispute. Missed: contested application is presented as certain.
3. Because the role intentionally combines covered and uncovered functions, neither member should complete the appointment unilaterally before the contractual deadlock process or a narrow declaration. A clean product-only role could fall within Mara's authority; a hybrid officer above $250,000 reasonably requires joint approval. Missed: the company inherits a voidable senior appointment.
4. Julian cannot sign the $1.2 million loan. The side letter expressly leaves debt issuance to joint approval, and "fundraising preparation" does not override it. Missed: the company becomes bound or litigates an unauthorized secured debt.
5. The lender knows the documents and Mara's objection, so apparent authority does not save unilateral execution. Missed: counterparty knowledge is ignored.
6. Prior product-director hires and selection of advisers do not waive approval for a high-paid officer or debt because they are different transaction types and below thresholds. Missed: unrelated conduct rewrites governance.
7. Issue written deadlock notice, hold the five-business-day executive meeting, mediate, preserve mutual records and access, and bar lockouts or unilateral banking instructions. If unresolved, seek a narrow declaration or negotiated role redesign before dissolution. Missed: threats manufacture a fiduciary and operational crisis in a solvent company.