Ending a business partnership
When partners divorce:
How to get out with dignity
More than 40 percent of American marriages end in divorce. More businesses fail due to disagreements between business partners. Therefore, it makes sense for business partners to prepare the equivalent of a prenuptial agreement to plan for an orderly separation. Even if there is no prenup, there are things you can and should do to make sure the separation goes well.
First, before you start or join the business, discuss at length with your proposed business partners your expectations, including ownership, positions on the board and as an officer, profit distributions, salaries, losses coverage and how you each see these changing as you grow. Doing this can head off many disagreements in the future. You may wish to have a trial period where you can be part of the business, but if it does not work out after a period of time, you can get out with no questions asked.
Next, make sure that the corporate documentation is in order. Organizational documents should have been filed, shares issued to shareholders, a board of directors elected and officers appointed. Too often, companies skip these “technicalities,” only later to find that there are no written documents stating who owns what or who is a director or officer. This makes determining who has control and can run the company rather difficult and ends up with the classic “he said, she said” nightmare.
It is critical that these steps be taken properly so that it is clear to everyone involved who owns what and is responsible for what. Money is very important and just like in marriages, disputes over money can ruin a company. It should be clearly established who can sign checks, make binding agreements with third parties, view financial statements and take other actions directly related to money coming in or going out of the company.
You should also consider entering into a buy-sell, or shareholder, agreement, which provides a mechanism for the parties to sell their shares back to the business or the other shareholders. There are a wide variety of these agreements, each of which can be customized, but at heart they establish when, why, how and at what price the parties can choose to, or be forced to, sell their stock and leave the company. These agreements can also spell out procedures for selling stock to unrelated parties.
Employment agreements for the founders and other significant employees are also a good idea. These agreements usually establish the pay and other perks of employment and also provide for termination or resignation and the consequences. They can also contain non-compete and confidentiality provisions that protect the company after a person leaves. Employment agreements serve both the company and the employee by laying out what happens when a person resigns or is terminated so there is no confusion or disagreement.
After a person has announced a departure, make sure to get them to resign from any positions held and take other actions necessary to make sure there is no longer a formal association with the company, including taking the name off bank accounts. If the person is being terminated or is not cooperative, make sure that all corporate actions, including board actions and other written determinations as to what is happening and why, are noted. Any public notices should be limited to a brief announcement, joint if a friendly departure, stating that the person has left your company and that all communications regarding the work should be directed to another person at the company.
Foolish actions
If, for some reason, you ignore my sage advice and do not do any of the above, and find yourself in a nasty fight with a business partner over who runs the company, you should be very careful. Emotions will be running high and people tend to do foolish things they later regret when feeling angry or betrayed.
Gather all the information about the situation you can, including letters, any signed agreements, e-mails, and notes that could support your position. Next, talk to an attorney. Get your own lawyer; do not use the corporate attorney because he or she represents the company, not you. Company counsel should avoid like the plague helping either side because of the conflict of interest issues.
It is important to know where you stand in this fight, so you should quickly exercise your right to demand corporate documents under Minnesota statutes. This will allow you to find out what the “official” corporate position is. If you control the corporate books, be prepared to have your business partner ask you for this information.
The ultimate issue is always who can prove they have control. Control comes in many forms, including who is the CEO, who is on the board but, most importantly, who controls the most shares of stock. Since the shareholders control a company, whoever can prove they control 50.1 percent or more of the shares will be able to run the company the way they want.
Minority shareholders are entitled to protection against acts of the majority that are abusive or designed to squeeze or freeze them out of the company, but the majority shareholder(s) will always be able to run the company. If it is unclear who the shareholders are or how many shares they own because the records were not made in the beginning or updated after, it may be impossible to determine who owns, and therefore controls, the company without the parties coming to an agreement or litigation.
Despite high emotions involved, it is almost always better to find amicable, or at least civil, solution to the problem. It may not be a win-win solution, but it should certainly not be lose-lose.
Be realistic about your position and the positions of those you have the dispute with when evaluating your willingness to fight to the death.. Litigation is very expensive and time-consuming. Unless a lot of money is on the line and you have the ability to devote significant money and time in litigation, find a way out that preserves all parties’ dignities and move on to your next relationship.
