05 / 05 / 2016

Causes of Partnership / Shareholder Disputes

What causes a great company to turn into a grotesque refraction of its own founders’ hopes and dreams? Why do partners and shareholders have to hire experienced business litigators, such as those at the VLF to address disputes between people who thought they all had a stake in the same company doing well?

Quite simply, it is the failure to govern expectations early.

Every partnership, limited liability company (“LLC”) or corporation has people who came together to form a new business.  In the beginning, they each sought to create or deliver to the market the next best idea, product, or process.  Whether the business started in a garage or from established industry professionals deciding to pool their talents, a new business represents the aspirations of its partners to do something better than the other guys, and to do something better for themselves.

So, what causes problems between a company’s members, its partners, its shareholders?  How does the business devolve from a hoped for world changing enterprise to a bitter battle to control the business, its clients, intellectual property and other assets? A fight so nasty that people who worked side by side for years see theft of corporate opportunity, using the business cash for extravagant personal purposes?  Greed? Paranoia? Some soaring bromide about the fleeting nature of man’s greatest efforts? The truth is far less the sort of thing you see in an epic movie. Rather, it is the avoidance of careful planning, hard decisions, and sober counsel during the excitement of the company’s launch.

The reasons that many partnerships and corporations go through a tumultuous “business divorce” is because they never clearly evaluated, communicated, negotiated, and memorialized what each member expected from the other at the outset.

When a business is founded, few founders actually think about how the business will be managed.  Little time is spared to hash out how to operate the day to day operations of the  business, especially on issues such as cash reserves, purchasing new equipment, taking “expense reimbursements” for a partner’s personal needs, or discussing how much time each of the partners will spend working at the business.

Did the founders discuss how decisions will be made if only one of the partners / shareholders works at the business, while the other wants to hold on to his or her regular job, waiting to see if the business takes off? Probably not.

When the founders of a business avoid discussing the hard topics and roles, responsibilities, money and investment, even a minor hiccup in the business may expose deep seated but unstated concerns one partner has with another.  An ebb in the company’s coffers can expose these deep set resentments. Partnership and shareholder dispute cases wind up in court when one (or a group) of the partners decide to start doing business on their own, separate from the partnership or the LLC.  They do it out of frustration, disagreements, or a fundamental difference in how the business is to be managed.

The problem is that “stepping out” whether in a business or personal context, has significant repercussions when it is discovered.  The other partners feel a sense of betrayal, and the business has a legal right to sue because business that should have been handled by the company is being handled by the disgruntled partner through a separate business (even if it is “business on the side”).  Once the relationship gets to this level, where business opportunities – clients, preferential deals – are taken by the disgruntled employee, the business lawyers get involved.

On the litigation side, VLF works with business founders to represent the business aggressively to stop the bleeding and protect the business’ opportunities.  We bring our knowledge and experience to bear immediately, using every tool available to us in the legal arsenal. But the business must make the decision to pursue the partner or shareholder as soon as it learns about the disgruntled partner taking business opportunities for him or herself. Even with a quick and capable litigation team, a business that does not have good governance documents will find itself at a disadvantage, having to rely on “one size fits all” default rules created by legislators, and unreliable loose concepts of equity as applied by individual judges to save the day.

The way to avoid most of these disputes and to make early intervention effective is to include rules and guidelines in the governing documents of the business.  To do this, the partners / shareholders must first have tough conversations and decide how the business will operate. The business is then structured according to what the partners agreed upon.  These are crafted agreements, clearly reflecting what the partners want, and not rubber stamped ‘off the shelf’ solutions for your most valuable asset.

Whether your business is facing the prospect of partnership / shareholder litigation, trying to stop a bad actor, or at the beginning of the business, where the governing documents must be crafted to what each partner wants out of the business, the business lawyers at VLF are ready to work with you and protect your business.

Your problem is our business.  We look forward to meeting with you.

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