“Should I sue my business partner?” you are asking yourself. You are fuming right now about what your business partner is doing to you and/or the business, and you are wondering if you should sue your business partner. Before pulling the trigger, understand what lies ahead:

Is there a way to negotiate yourself out of this before suing your business partner?

Going to court should always be the last resort. Court actions are costly and time-consuming (years, not months) and can destroy what is left of your business and your sanity. While your attorneys will do most of the heavy lifting, you will have to spend a lot of time cooperating with them and gathering relevant evidence. So try your best to come to the table with your partners to negotiate a good outcome before going to court. Give a little, take a little.  And even if you are already well into a lawsuit, consider settling before trial.

What do the Agreements say?

Your decision to sue your business partner or settle begins with your business agreement. You, or preferably your attorney, should check whether you have a written agreement with your partners and what it might say about your dispute. If your business is a corporation, there may be bylaws, a certificate of incorporation, and a shareholder agreement. If it is a limited liability company, there may be an operating agreement. Each of these documents, and others, may have relevant provisions.

Even if you have no formal documents, other writings could act as agreements between you and your partners. Do you recall all the promises made in email correspondence or phone texts – or on cocktail napkins? Any document showing some sort of consent may be helpful.

If you do not have anything in writing (like many small businesses, unfortunately), you need to look to the New York laws dealing with your specific entity: for LLCs, the New York Limited Liability Company Law (NYLLC), and for corporations, the New York Business Corporation Law (BCL). These laws also apply if you have a written agreement that says nothing about the issues behind your dispute.

What are my Remedies if I sue my business partner?

Your next step is to consider what you might get in court or through negotiation. Obviously, the cure depends on the problem.  But certain remedies often come up in partnership disputes.

Access to Books and Records

You can demand to see the books and records of the business.  If needed, an expedited legal proceeding (meaning it takes months, not years) can enforce this right.  The governing law is set forth in BCL 624 and  NYLLC 1102.  Inspection rights of members and business owners are not absolute, but any legitimate purpose will likely satisfy the court.  In any event, a demand can signal to your partners that you mean business and may force them to choose good faith negotiation over digging in their heels.

Claim against Partners who damaged you or the Business

You may have a claim against fellow business owners for misbehaving toward you or the business.  Managers and managing members of New York LLCs owe fiduciary duties to the other members (while non-managing members of manager-managed LLCs do not).   Officers and directors of a corporation owe fiduciary duties to the corporation and the shareholders.  Shareholders do not owe fiduciary duties to each other – except in very small corporations or where the shareholders are essentially managing the corporation.

A fiduciary duty is an obligation to act in good faith, to treat co-owners fairly and in accordance with the deal struck, to act in the best interest of the business and its owners, and to refrain from fraud, taking assets for one’s own benefit, wasting assets, competing with the business or diverting clients away from it. If your partner violates this duty, you may be able to sue the partner directly or on behalf of the LLC or corporation.

If there is a breach of those duties, you may be able to sue the person committing the breach directly or, if the breach was more towards the business, you could sue on behalf of the LLC or corporation, a so-called “derivative” action.

Forced Break-Up of the Business

Under certain circumstances, you may be able to take your dysfunctional business family to court and have a judge dissolve the business and order it to liquidate its assets.  You will first need to ask yourself if this drastic step is really the best outcome. The value of a business lies in its operations and goodwill as a going concern. But sometimes, it can be a good idea to bring such a lawsuit anyway because it may force your partners to consider a buyout – and the court may even order one.

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 a corporation, you can have a judge order dissolution by showing that management is hopelessly deadlocked (Section 1104 of the BCL).

If you own at least 20%, you can have a judge order dissolution by showing that management is guilty of illegal, fraudulent, or oppressive actions toward the complaining shareholders or that the corporation’s assets are being looted, wasted, or diverted for non-business purposes by the directors or officers or others in control.  In deciding over such a case, a judge has some options under the law and could conclude that liquidation of the corporation is too harsh a remedy and that there less painful means, such as a buyout, to give you what you are owed and protect your rights (Section 1104-a).

So a shareholder with 50% or more has two options, under 1104 and 1104-a.  But the choice needs to be carefully considered since 1104-a petitioners can be forced to accept a buyout. 1118 BCL gives your opponents the option to buy you out for the fair value of your ownership share. What is fair value? Unless you agree on an amount, a battle will commence between experts who follow complicated rules and methods established over time.

Forced Dissolution of a Limited Liability Company

Many LLC owners are surprised to learn that their break-up rights and remedies are much less defined than in a corporation.  Dissolution of an LLC is codified in Section 702 of the New York Limited Liability Law.   Under 702, you need to show that management is not willing or is unable to pursue the stated purpose of the LLC, or that continuing the entity is financially unfeasible.   Easy in theory but difficult in practice.  That management may be hopelessly deadlocked or guilty of misconduct is not always enough to justify a dissolution under Section 702.

Equitable Buyout

In connection with this proceeding or standing on its own, a court may decide to grant an “equitable buyout,” meaning it is not provided for in the written law, but the court thinks it is a good idea to protect the business owners.  An equitable buyout consists of one member being forced to sell his/her ownership interest to the other member.  But don’t rely on this since this equitable remedy is very new and the requirements a little murky.  It seems that a prerequisite for the equitable buyout is that you can show that you also have a good case for dissolution under Section 702 and that a buyout is really the “most equitable method of liquidation.”  So it all depends on the individual facts.

Do you need legal action immediately?

Many people are anxious to bring injunctive relief as soon as the dispute hits the fan.  Injunctive relief means that a court will relatively quickly stop the rogue business owner’s shenanigans without waiting for a trial, which can take years.  Injunctive relief requires that you can show a high likelihood that you would win after trial, and there would be irreparable injury without this expedited relief.  An example would be any action that significantly affects the control and management of the LLC or corporation.  Courts have held that such misconduct can have irreparable consequences.  Anything that can be fixed with money damages is less likely to be a candidate for injunctive relief.   However, bringing an action for injunctive relief rather than waiting for the wheels of justice to turn can make or break your litigation strategy.  Even if you have a good case, a lost injunctive relief petition may shift the balance in favor of your opponent.

Call me if you have any questions about the above topic.  And also see “Business Partnerships Gone Bad.”

Picture this: You’ve been happily doing business with your fellow LLC members for some time now.  But now, trouble is brewing on the horizon.  The other two members are ganging up on you and exclude you from any further business dealings.  When you ask to see the LLC’s books, records, bank accounts, tax returns, or other financial records, they tell you that you don’t have any right to see such documents.

The majority ousted LLC member often lacks access to information about what is going on in that LLC business.  While such a member often suspects wrongdoing, he cannot look at the LLC’s bank accounts, accounting, and other records, because the other members refuse to show it to him.  What is he or she supposed to do?

Access to LLC Books and Records

Luckily, the New York LLC law gives the ousted (or any) LLC member an explicit right to ask for the LLC’s books and records.  The law provides in Section of 1102 of the New York LLC law that:

“Any member may, subject to reasonable standards as may be set forth in, or pursuant to, the operating agreement, inspect and copy at his or her own expense, for any purpose reasonably related to the member’s interest as a member, the records referred to in subdivision (a) of this section, any financial statements maintained by the limited liability company for the three most recent fiscal years and other information regarding the affairs of the limited liability company as is just and reasonable.”

The records mentioned in subdivision (a) are:

“(1) if the limited liability company is managed by a manager or managers, a current list of the full name set forth in alphabetical order and last known mailing address of each such manager;

(2) a current list of the full name set forth in alphabetical order and last known mailing address of each member together with the contribution and the share of profits and losses of each member or information from which such share can be readily derived;

(3) a copy of the articles of organization and all amendments thereto or restatements thereof, together with executed copies of any powers of attorney pursuant to which any certificate or amendment has been executed;

(4) a copy of the operating agreement, any amendments thereto, and any amended and restated operating agreement; and

(5) a copy of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the three most recent fiscal years.”

Additional LLC Information

But the LLC member is not necessarily limited to asking only for these records.  The law also gives access to “other information regarding the affairs of the limited liability company as is just and reasonable.”  This can open the door to asking for more detailed records, such as proof of expenses, revenue, bank accounts, or other documents underlying the LLC’s business accounting.   The judge ultimately had discretion on how much access will be granted.

Claim for an Accounting

While it is not mentioned in the law, the courts have also given LLC members the right to ask for an accounting of the LLC business.   In other words, you may ask for a full picture and explanation of the LLCs financial affairs.  This is a different claim than the one for books and records since it asks for much more than just the opportunity to review financial information.  You may be entitled to ask for explanations underlying the financial information to get a full picture of what went on.  You cannot demand this on a whim or what your adversary would call a “fishing expedition.”  There have to be some allegations of concrete wrongdoing by the LLC members in charge.  The LLC members in charge cannot counter that they already gave you access to the books and records under 1102 because this is a much broader demand.

Majority Member Defenses

Is there something that the remaining members can do to prevent you from getting the desired access to the LLC’s books and records?

Yes, if the other members can plausibly show that any information sought is in the nature of trade secrets or their disclosure is not in the best interest of the LLC, they may be able to restrict such material.  But this is not easy to show and they have to have those rights under the operating agreement or show special circumstances in order to succeed.  Plus, you can offer to sign a confidentiality agreement to protect such information from third parties.

Pre Lawsuit Demand

In both claims described above, the claim for access to books and records and the claim for accounting, you have to make a formal written demand before bringing a lawsuit.  You can do it yourself or have your attorney do it so that the secretive LLC members get the message that you are serious.

Operating Agreement

Finally your operating agreement may contain special provisions about access to books and records.  So make sure to read the operating agreement to see whether it mentions any particular requirements to access the LLC’s books and records.