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Contracts

LLC Member Bankruptcy and Automatic Buy-Out Provisions

LLC Member Bankruptcy and Automatic Buy-Out Provisions

Lindsey Brown

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When an LLC member claims bankruptcy, or otherwise becomes insolvent, it can pose problems for the LLC and other members. Many operating agreements contain provisions addressing this scenario, which often allow for the other members to immediately purchase the membership interests of the bankrupt or insolvent member. The buy-out process is often automatic, meaning the insolvent member has no choice in the selling of their membership interests. This is a harsh remedy, appropriately reserved for situations where the bankrupt or insolvent member is in serious financial peril. 

We recently worked on a litigation matter which involved an LLC member who had unpaid federal taxes. The operating agreement did not state whether this type of debt should trigger the insolvency provision. More specifically, the agreement failed to address whether the mere existence of this tax debt constituted a nonconsensual lien on the member’s membership interests, or if the affirmative filing of a federal tax lien was required. This was an important determination, as it ultimately would trigger the automatic buy-out process by the other members.

The drafter of the operating agreement had failed to articulate whether the mere existence of a federal tax debt, and in turn the arising of a statutory or inchoate lien, was sufficient to trigger the provision. It was also unclear whether the operating agreement required that such lien be filed in the state or county where the LLC was located. Ultimately, we were able to successfully advocate for our client, who had tax debt but did not want to offer their membership interests for sale under the terms of the insolvency provision. The Judge agreed that the Internal Revenue Service (IRS) must take affirmatives steps, such as filing a notice of federal tax lien, for the provision to be triggered. This makes sense, as the mere existence of a statutory lien does not pose any real or immediate threat to the LLC or its other members. While winning this argument was incredibly helpful to our client, it was not without cost.  

Had the drafter of the operating agreement clearly defined the triggering terms of the provision, the entire litigation could have been avoided. Making sure the terms and consequences of these type of insolvency provisions are crystal clear is of utmost importance. Drafting with such clarity affords protection to both the bankrupt member, and to the other members. While it is impossible to define every term or predict every situation that might arise in an LLC relationship, it is imperative that drafters of operating agreements clarify which specific scenarios trigger automatic buy-out provisions, as the consequences of such provisions are severe.

ABOUT THE AUTHOR

PARTNER

Lindsey is a litigation partner and mom to her one-and-a-half-year-old daughter. Lindsey is proud to work at Milgrom & Daskam, where being a parent and an attorney is celebrated and encouraged. Milgrom & Daskam works to support its working parents by fostering dialogue and understanding.

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Contracts

Legal Fundamentals of Contracts for Influencers and Brands

Legal Fundamentals of Contracts for Influencers and Brands

Madison Shaner

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Whether you call them influencers, brand advocates, or goodwill ambassadors, social media content creators represent a rapidly growing marketing segment, with companies set to spend up to $15 billion on influencer marketing by 2022.

As more and more businesses move toward using content creators and influencers in their marketing campaigns, and as the percentage of marketing budgets spent on content creators grows, the question becomes how to effectively paper these transactions to protect both content creators and the businesses that hire them. 

The use of content creators for marketing allows businesses access to targeted demographics in an easy, relatively inexpensive manner, and the quality of traffic driven to businesses from content creators is often seen as better than traffic coming from other sources. Influencer marketing, especially ads in stories, has a significant impact on click-through rates because the content feels less like an advertisement to viewers. Consequently, viewers may be more inclined to trust the ads and to purchase products featured. With changes to how apps can track user activity and therefore how brands can use that information to target ads to their desired audiences, even larger portions of marketing budgets may move toward the use of content creators as time goes on.

If your business hires content creators for marketing campaigns or has ongoing relationships with content creators, having effective and efficient contracts with your influencers is critical to protecting your business. Alternatively, if you are a content creator, the contracts you sign as you work with companies are critical to building your brand and maintaining your own business. The contracts between brands and content creators should cover everything from employment status, to the payment and posting terms, to the ownership of intellectual property, to the requirements set forth by the Federal Trade Commission (FTC) and truth in advertising, and even what happens if either the brand or the content creator does something that results in being “canceled,” or how the parties can part ways.

If a business and a content creator don’t anticipate an ongoing contractual relationship, the parties should, at a minimum, document the brand’s permission to use the content and the duration and parameters of that grant. For instance, if a content creator posts images unsolicited by the brand that features the brand’s product, the brand should make an inquiry to the content creator and obtain their permission before reposting the images. Failure to obtain the content creator’s consent to re-posting the images may result in claims of copyright infringement or misappropriation of the creator’s right of publicity and may lead to Digital Millennium Copyright Act (DMCA) takedown requests through social media platforms. This could negatively impact both the brand’s image as well as its ability to market itself on the content creator’s social media channel in the future.

Critical to the conversation around using content creators in marketing is the FTC’s increased interest in influencer advertising. FTC rules provide that content creators must disclose their relationships with brands within their posts so that followers can understand whether the content that they are seeing is organic or whether it’s an ad that the content creator is being paid to post. Failing to appropriately disclose the relationships between brands and content creators can result in penalties, fines, and legal fees. In November 2019, the FTC released a “Disclosures 101 for Social Media Influencers” brochure to teach content creators how to correctly disclose when the content they post constitutes a paid endorsement. In 2020, the FTC requested public comments on whether the guidelines for influencers should be revised. The guidelines from the FTC indicate that even products received for free in exchange for an endorsement trigger the disclosure requirement, and the disclosures must be easy to understand and placed in such a way that an average viewer would be able to see that the content is sponsored.

While the FTC guidelines place adherence to the disclosure requirements on the shoulders of content creators, it is incumbent on companies to ensure content creators they work with are following these requirements because brands may also be held liable when the content creators they work with aren’t diligent about their disclosures. For instance, in March of 2020, the FTC entered into a settlement with Teami, LLC, for $1 million after alleging that Teami promoted its products using deceptive health claims and endorsements by well-known influencers and celebrities who failed to adequately disclose that they were being paid to promote the products. The FTC imposed a $1 million fine on Teami after determining that Teami would be unable to pay the full $15.2 million judgment against it.

The corporate attorneys at Milgrom & Daskam have extensive experience drafting and negotiating contracts between businesses and content creators. If you are entering into such an agreement and would like counsel to help you protect your interests, feel free to reach out to the corporate practice group at Milgrom & Daskam for a free consultation

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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