WE ARE BUSINESS PARTNERSHIP DISPUTE LAWYERS 212 253-1027
When formerly friendly business partners start having problems, stop talking to each other, can’t agree on anything, have secrets, and simply don’t cooperate anymore in bringing the business forward, you may wonder what grounds there are to sue your business partners.
Breach of Contract
Limited Liability Companies may have an operating agreement and corporations may have a shareholder agreement. These are contracts. If any conduct or omission of the business partner or the LLC or corporation is in breach of these agreements, this would be a breach of contract with a claim for damages. Thus, most business partnership disputes start with an investigation of the contracts between the parties.
Access to Books and Records
A common lawsuit is a request for access to the books and records of the business. Often, one or more partners exclude another partner from such access under dubious circumstances. A shareholder of a corporation and a member of an LLC have a clear and absolute right to access the business’s books and records.
Breach of Fiduciary Duties
Another common ground to sue a business partner is that he or she violated duties and obligations to the business and the other members. This is called a “breach of fiduciary duties.” Almost all lawsuits among business partners contain a claim of breach of fiduciary duties. Business partners owe each other and the business the utmost duty of loyalty and honesty. Section 409 of the LLC Law expressly states that LLC managers must act “in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances.” This means they cannot embezzle or waste the business assets; they cannot compete against the business. They cannot neglect their work responsibilities and so forth.
Section 720 of the New York Business Law allows for lawsuits against directors and officers if they are guilty of neglect of, or failure to perform, or other violation of their duties in the management and disposition of corporate assets committed to his charge, among other things.
If a breach of fiduciary duty claim is directed at actions that harmed the business rather than the individual business partner, the action has to be a so-called “derivative lawsuit” where the complaining partner sues the misbehaving partners on behalf of the business. If such a lawsuit is successful, the misbehaving partner would owe the damages caused to the business, not the individual partner. An example would be a business partner stealing money from the business. The other partner can bring a lawsuit on behalf of the business, derivatively, against the stealing partner.
Not every decision by a fellow business partner that you don’t like is grounds for a breach of fiduciary duty lawsuit. There is something called the “business judgment rule.” Courts will not second guess decisions made by a director or managing member which were taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.
Demand for an Accounting
Under certain circumstances, a business partner can ask the court to dissolve the business and then distribute the assets to the owners. For example, if the management of the business is hopelessly deadlocked or guilty of oppressive actions against you as a shareholder. An LLC member can force a dissolution if management is unable or unwilling to reasonably permit or promote the entity’s stated purpose or if continuing the entity is financially unfeasible.
Under certain circumstances, you may have a right to dissolve the business and then have the assets of the business be distributed 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
50% shareholders of a corporation 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 the shareholders own at least 20%, they can 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.
If the lawsuit is based on oppression, the opponents can force the plaintiff to accept a buy-out of his or her stake in the business.
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 Law does not provide for a buy-out election or all the other specific rights in the business corporation laws.
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”
Is a deadlock or total conflict between the members sufficient for a dissolution? Not always. Courts have held that 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.
Many clients wish to be bought out by their fellow business partners or buy out those partners. They are surprised to learn that there are very few ways of forcing a buyout. Unless the governing contract has any special provisions dealing with partners’ exit opportunities, the possibilities are slim. There is the possibility of having a judge grant an equitable buyout, but the road to such an outcome is long and uncertain. Then there may be the possibility of a so-called “freeze-out merger” where a business sheds a problematic minority owner by merging into a new company and paying the minority member the value of his or her interest.
However, in our experience, negotiation may often lead to the desired buy-out remedy. Either before a lawsuit is commenced or as a settlement after a lawsuit has gone on for some time.
Most litigation dealing with business partnership disputes is more strategy than going it all the way to trial. Pressuring the misbehaving business partner with all available claims and publicity (court proceedings are for everyone to see) often results in meaningful negotiations and settlements, including desired buy-outs.
We can help you resolve business partnership disputes by fully investigating the matter, exploring all possible alternatives, and taking the other business partners or the business to court. If it is necessary to sue, we will guide you and forcefully pursue your rights in court. Do not hesitate to call us for a free consultation about your case.
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RATSCHKO WALLACE PLLC