During the 25+ year history of The Collins Law Firm, the most emotionally-charged disputes we have handled are those involving business partners. For many business partners, their relationship with their business and their partner is at the core of how they see themselves as human beings, and their expectation of loyalty from their partner is very high. That is why, when one partner believes that another has behaved dishonestly, the sense of betrayal can be overwhelming and can provoke a legal and personal battle that threatens the very existence of the business.
At a very basic level, partners owe their business and each other “fiduciary” duties—among them are: honestly, loyalty, diligent effort, and full disclosure of matters important to the business. These duties are breached, and the seeds of the destruction of the partnership relationship and business are sown, when one partner, for example:
- Starts or joins a company that competes with the partnership
- Leaves the partnership, and solicits important customers and/or employees to leave with her
- Stops giving the partnership business his full effort
- Uses partnership assets for personal reasons
- Does not keep her partner adequately informed about problems with the business
- Makes important decisions unilaterally, without consulting his partner
Other problems can arise in a partnership that don’t necessarily involve breaches of duty. Sometimes, over time, one or both partners’ commitment to the business, or expectations of their partners and of the business, can change. For example:
- One partner no longer wishes to dedicate 60 hours a week to the business, preferring instead to spend more time with his family. This very typical life experience need not be a problem, but can become a very serious one, if that partner expects the same compensation for less work. The partners who now must shoulder more of the work load—and for no additional compensation—can understandably become resentful.
- Both partners continue to work very hard on the business, but one becomes far more responsible for the business’s success than the other (e.g., a very accomplished salesperson), and wants to be rewarded with a greater share of profits. Some partnerships start out “50-50”, often because the partners are friends, and don’t have any better idea in the beginning about how to compensate themselves and split profits. But, over time, when one partner emerges as more important to the business, and that original “50-50” agreement is no longer realistic, the business can unravel if this is not handled thoughtfully.
- One partner does not appreciate the value the other brings to the business. This often occurs when one partner handles the “operations” of the business, and the other contributes the money necessary to finance the business. The first may believe that he is working much harder, and many more hours, than the other, and come to believe that he is therefore due much more of the profits. The second, on the other hand, may believe that money is the “life’s blood” of the business, and that, while her partner does put in a lot of hours, it’s not very challenging work and “anyone could do it” and, therefore, the operations partner could be easily replaced.
- One partner wants to bring in a third partner, but the other does not. One partner may perceive that the business is lacking something important—for example, financial sophistication or technological skill that was not necessary when the partnership started—but the other either does not see this as important, or believes that the need can be adequately addressed by hiring an employee, rather than bringing in a third partner. This is obviously a delicate situation, as it threatens to disrupt significantly the financial and other aspects of the two partners’ relationship.
The business lawyers at The Collins Law Firm have seen how these partnership disputes unfold, and how ruinous they can be if not managed properly. Through our experience in these circumstances, and our knowledge of the law and facts that apply, we have helped clients understand their legal options, including whether to litigate or mediate a dispute. Sometimes, all that may be required is for the partners to have the one-on-one discussion about business issues that they may not have had for years, to see if they can come to a peaceful understanding. At the other extreme, sometimes a tough decision needs to be made about: whether the business can go on as a partnership with these two people; whether it should be dissolved; or whether one partner should buy out the other.
At The Collins Law Firm, we understand, and help our clients understand, that, at the heart of these decisions is a central question: “Has the trust between partners been damaged irrevocably?” If it has, then the partnership cannot go on. What happens from there is what matters: will the partners be able to peacefully un-wind their partnership, and preserve for their individual benefits the value of the business—maybe sell the business to someone else? Or is the feeling of betrayal so powerful that a legal fight is necessary to sort this all out? Sometimes, these issues can be sorted out amicably. That is what we advise, because the consequences of an expensive, emotional battle can be very unfortunate. But sometimes the battle cannot be avoided. It often depends on the temperament of the partners, what is at stake, and the availability of resources to wage legal war.
Because we have helped our clients through so many of these kinds of business threatening disputes, Collins Law Firm attorneys are also able to counsel our clients on the front end, to do everything possible to ensure that partnership disputes don’t arise at all, or, if they do, that they don’t threaten the very existence of the partnership. And so we counsel, for example:
- Written agreements between partners. In simple terms, these agreements spell out what each partner will do, and how important business decisions, including compensation and profit-splitting, will be made.
- That the partners have a written plan for how disputes will be resolved before an expensive legal battle becomes necessary. Mediation often makes sense. Sometimes, private arbitration, rather than a court battle, is wise, so that the partnership’s “dirty laundry” is not aired in a public courtroom, for all—including employees and competitors—to see.
- That partners consider whether their agreement should include an “attorney’s fee” provision, which requires that, if one partner sues the other, the losing partner pays the legal expenses of the winning partner. Such a provision drives up the expense and risk of a legal fight, and can have the effect of making partners think long and hard about whether they want to have the legal fight at all.
- That partners have mechanisms in place—formal and informal—requiring the partners to regularly discuss issues that are important to their business.
If you are involved in a dispute with your partner, or would like legal counseling about how best to avoid such disputes, the business lawyers at The Collins Law Firm can provide you with the very best of advice. We have a keen understanding, gained through years of experience, of what is at stake in a partnership dispute, why it must be handled (if at all possible) in a way that does not threaten the business, and what the best options are for accomplishing this and protecting your interests.