Business Partnerships Gone Bad

Business Partnerships Can go Bad.  Picture this:

own a restaurant with three other people.  Lately, all we’ve been doing is fighting over almost everything.  Now it seems that everybody turned on me.  I have not seen any money from the business.  Meanwhile, everybody else uses the restaurant as their own piggy bank.  What can I do?

A business break-up of a business partnership can be as stressful and emotionally draining as the breakup of a marriage.  And there is always a child involved….the business.  So when your business partnership has gone bad, you really want to find out where you are standing and what rights you may have vis a vis the other business partners and the business.

Imke Ratschko Small Business Lawyer

For legal advice, call 212 2531027 or contact me here.

The Agreements

Whatever your gripe against your business partners may be, the first question is always: What does the agreement say?  You have to check whether you have an agreement with your business partners and what it says with respect to your problem.   If the business is run as a corporation, check your shareholder agreement;  if it is an LLC, check the operating agreement.

If you do not have anything in writing (like many small businesses, regrettably), you have to look to the default rules of the respective New York laws dealing with your specific entity.     For LLCs, it is the New York Limited Liability Company Law and for corporations, it is the New York Business Corporation Law.  These laws also apply if your agreement is silent with respect to your issues.

The following assumes that your relationship is governed by the default rules and that it is organized as a New York corporation or a New York limited liability company.  So always remember that your particular agreement may have different provisions.

I want to hold these people responsible.  They are stealing from the company.  If this continues we’ll go bankrupt and all my investment is lost.

Lawsuits against Rogue Business Partners

There are many avenues to hold rogue business partners responsible.  You can go to court and sue them for a breach of fiduciary duty.  Business partners owe the utmost duty of loyalty to the business and their business partners.  If the damage is to the company, they have to make the company whole.  If they harmed you, by kicking you out of a position of management and control, you may be entitled to damages.  If the damage is to the company, you will have to bring a lawsuit on behalf of the company, a so-called “derivative” claim.  Be aware that in many cases a lawsuit for breach of fiduciary duty, if it is for money damages, has to be started within 3 years.

I just want to leave this behind me.  They should buy me out and let me go.  I am doing them a favor because somebody will get hurt if we don’t come to a resolution soon

Unfortunately, as a shareholder of a corporation or a member of an LLC, you may not be able to convince your estranged business owners to let you go and buy you out.  Unless your agreement provides for some withdrawal/buy-out remedy, you will remain a member/shareholder until the business dissolves or until the other owners agree to buy you out.

Is there a way that I can force a break-up of the business?  If they don’t want to compensate me for leaving in peace, we should just close shop and call it a day.

Forced Business Partnership Break-Up

Under certain circumstances, you may be able to take your dysfunctional business family to court and ask the judge to dissolve the business and then distribute the assets to the owners.   If you can succeed with such a drastic step, depends on the facts of your situation and whether you are a shareholder in a corporation or a member of an LLC.

Forced Dissolution of a Corporation

If you (alone or together with other owners willing to go into battle with you) own  50% of the shares in the corporation, you can petition a court for dissolution of the corporation by showing either one or both of the below:

– management is hopelessly deadlocked; or

– management has been guilty of illegal, fraudulent or oppressive actions toward you.

If your ownership is at least 20%, you can still petition under the second showing above, namely, that the other owners have engaged in illegal, fraudulent or oppressive actions.  But in those cases, a judge has certain discretions and may conclude that the  liquidation of the corporation is too harsh a remedy and that there are other feasible means to give what you are owed and protect your rights.  In that context, a judge may conclude that a buy-out may be a proper remedy for your situation.

Buy-Out Election

If you decide to sue your estranged business owners based on oppression, you may be in for a surprise, because your opponents could force you to accept a buy-out of your stake in the business.  The business corporation law gives your opponents the option to buy you out for the fair value of your ownership share.  But they must make that election within 90 days after you have filed your papers.   What is the fair value of your ownership stake?  Unless you agree on such value, it will be a battle of the experts who follow specific rules and methods established over time.

Forced Dissolution of a Limited Liability Company

Many owners of a Limited Liability Company are surprised to learn that their business break-up rights and remedies are much less defined compared to a corporation.   A minority member of an LLC has limited possibilities to force a dissolution of the LLC and the majority members of an LLC are not able to force the minority member to accept a buy-out.

The only remedy for a forced dissolution of an LLC is in Section 702 of the New York Limited Liability Law, whereby a member can force a dissolution whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement.   The New York Limited Liability La does not provide for a buy-out election or all the other specific rights in the business corporation laws.

Imke Ratschko Small Business Lawyer

For legal advice, call 212 2531027 or contact me here.

However, by now, the courts have given some guidance.

For a dissolution under Section 702 Limited Liability Company Law  “the petitioning member must establish, in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible”

If a dissolution is justified, courts have now even granted a so called “equitable buyout”, whereby an LLC member is allowed to purchase the other member’s interest in the LLC.  This is not really a dissolution then, as the LLC continues its existence after the buyout.

Is a deadlock or total conflict between the members sufficient for a dissolution?  Not always.  Courts have held that a dissolution is not warranted despite disagreements between the members when the limited liability company can otherwise continue to operate in furtherance of achieving its stated business purpose.

The reality of many dissolutions fights over corporations and LLCs is that many end in settlement.  In certain situations, a court action towards dissolution may be the right strategic move to convince your business partners that they have to come to the table and negotiate with you, rather than spend a fortune on litigation.

Short of dissolution, don’t they have to pay me my share of the profits? I have not seen anything in terms of money.

Right to Profits – Access to Books and Records

Prior to dissolution, you have a right to profit distributions.  If the other members/shareholders pay themselves, most likely, you have a right to a similar distribution, based on your ownership percentage.

I don’t even know how the business is doing financially and how much they are paying themselves. How can I get access to that information?

Each shareholder of a corporation or member of an LLC has a right to inspect the books and records of the business.  Write them a letter and demand to see them.  If they don’t let you, you can take the matter to court.  The law provides for an expedited proceeding giving you the right to see the books and records; sometimes this gets the ball rolling for serious negotiations and makes the parties come to the table.

My business partner is making decisions without me, can he do that?

When it is just you and one other owner, certain major decisions have to be made by consent of all owners.  For example, the other business owner in an LLC cannot just take in another member without your consent.  But day-to-day decisions can be made by any member, see for LLCs here.

When it is you against more than one other business owner, there is the possibility that they can outvote you, even on certain very important issues.  But they have to follow proper procedure and notify you of all decisions made without your consent.  Finally, they can’t just decide to do whatever pleases them.  If their decision completely lacks any business judgment or is just designed to damage you and your stake in the business, you may have a claim against them based on their breach of fiduciary duties against you or the business.