The Gloves are Off – When Business Partners Declare War
Love them or hate them, Business Partners can be a huge asset to your business. The best kind of Business Partners are the ones with similar goals, trust and a focus on the business. On the other hand, Business Partners can become become your worst nightmare, especially if your goals are mismatched, there is a loss of trust, the business is doing poorly or the partner is simply a bad egg (For example, read Avoid Narcissistic Partners). In this article, we will be discussing the bad type of Business Partner.
Is your Business Partner an Asset or a Liability?
Considering Business Partners
When considering entering into a partnership (or otherwise aligning with one or more partners), it’s very important to do so carefully and with your eyes wide open. This is especially true when the new potential partner is a friend or family member. For reference, we’ve written several blog articles in with tips regarding new partnerships, including Tips for Successfully Joining a Partnership and Considerations when Buying a Partnership Interest.
Leaving a partnership must be done with as much care as entering a partnership. We’ve written extensively on this, including Leaving a Partnership — How to do it Right and Rogue Business Partners. These are MUST READ articles if you’re thinking of leaving.
Leaving a partnership needs to be done with care.
Business Partners Gone Wild
Unfortunately entering or leaving a partnership can be messy. Business Partners often turn to litigation after they are “kicked-out” (or feel that they have been kicked out) by their partner or partners. Without any exaggeration, we’ve seen the following situations in the past 6 months alone:
- Planned Failure. We’ve seen a CPA charged with the financials of the company “doctor the books” to make the company look terrible on paper, and steal hundreds of thousands of dollars from the company in an attempt to make his partner “walk away from the company.”
- Violent Child. We’ve seen a son forcibly remove his father from the company premises. Keep in mind the father is the founder, majority owner of the company, owns the real estate the business is sitting on, and also happens to have his name on the titles to several assets. The son further attempted to forge the father’s name on a number of “corporate documents” in an attempt to defraud the father from the business, the real estate and the titled assets.
- Changed the Locks. We’ve seen a brother change the locks on the doors to his sister’s business, forcibly preventing the sister (the founder and sole owner of the business) from entering back onto the business. The brother eventually completely took over the business, left the outstanding debt in the sister’s name, and converted the business into something else entirely.
- Ganging Up on the Sick. We’ve seen one partner develop a serious disease that requires him to take some time off only to have his other two partners lock him out of the business, literally tackle him when he shows up in an attempt to collect his personal affects, and prevent him from accessing any of the corporate documents.
- Forced Retirement. We’ve seen younger junior partners gang up on the older founding partner, acting very aggressively in a hostile manner to influence corporate decisions, preventing distributions and insisting on enforcing corporate formation documents that have clearly been overridden by later corporate documents — all in an attempt to create a hostile working environment for the older, senior partner and attempt to force said partner into retirement.
Every one of these situations is simply unacceptable. Violence, intimidation, forging documents, bad faith, and not following corporate formation documents are never appropriate, and never a final solution. Despite this, what does one do when confronted with any of the above situations?
Before we give you tips on how to deal with these situations, please keep in the mind the following: It’s a very rare set of circumstances that would legally permit any partner from simply “kicking out” another partner. If it is possible for the partner (or partners) of a company to “kick out” another partner, it will be because the corporate formation documents (with every partner’s signature on it) permits this, but it will be a carefully choreographed process and almost always require the company to compensate the departing partner justly and fairly (otherwise, who would be willing to sign a formation document that permits themselves to be kicked out without any remuneration/compensation whatsoever?).
Please remember what I just said: If your partner or partners have “kicked you out,” it’s very unlikely that they can legally do so.
Stay Calm, Stay Safe, Document Everything
Avoid acting rashly or getting into dangerous situations!
Hopefully, you will never find yourself in any of the situations I described above. However if you ever are in such a situation, it pays to prepare yourself. Don’t panic. Keep yourself safe. Have an extra copy of the corporate documents in your home or another safe place outside of your office.
If you do find yourself in any difficult situation, please follow these tips:
- Never put yourself in a dangerous situation. If you feel threatened, call the police and file a police report.
- Avoid verbal confrontations as well as verbal agreements / compromises (which can be denied or revoked later). Make sure everything is written down, even the small stuff. Attempt to summarize conversations, agreements, factual circumstances, etc, in email.
- Avoid confrontations by yourself. Bring disinterested people with you, to act as witnesses and hopefully keep the other party at their best behavior.
- Seek the advice of a competent business attorney to help you understand your rights, duties and options.
- DOCUMENT EVERYTHING. Keep a journal.
- Be proactive. Don’t let such a circumstance fester, and don’t leave it alone for weeks, months or years. If you do, you may irreparably impact your ability to reclaim your business or its assets.
What options are available to you to resolve Business Partner issues and disputes? Thankfully, we don’t live in the “wild west.” Ownership in a company is like having ownership in your home — people cannot simply kick you out and leave you out in the cold. You have legal recourse:
- Simply hiring an attorney to represent you can have a profound impact with your partner, and the attorney may be able to negotiate something on your behalf quickly and cost-effectively.
- If your partner’s behavior is particularly egregious, you can seek a “temporary restraining order” (or TRO). Judges don’t necessarily like to issue TRO’s, so be prepared to back up your request with actual proof of egregious behavior. Violence, threats of violence, clear evidence of theft, dangerous activity, drug use, etc, can all be evidence of egregious behavior. Again, DOCUMENT EVERYTHING.
- You can file a lawsuit seeking “a judicial dissolution,” to kick your partner out of the company, or to compensate you for the loss of the business, lost profits or more. Lawsuits are expensive, time consuming and take a long time, so a lawsuit isn’t necessarily a “short term” solution for a bad or rogue partner.
- You can call the police, but beware the police will not get involved in “civil matters.” However, the police will get involved to keep the peace. Therefore, if you are seeking entry onto your business, but are threatened with violence, the police will (usually) intervene. If you wish to pick up your personal affects or make copies of corporate documents, the police will usually be willing to accompany you to prevent violence.
Ultimately, while it may take a long time, be fraught with emotional distress, and ultimately see your business significantly drop in value, you can be entitled to be “made whole” depending on the circumstances. Talk to a business attorney to understand your legal rights, duties and options and don’t lose hope. The law is on your side.