An Amicable Ending?
Partnerships can be the most fragile of business relationships and are the ones most often dissolved. This may occur through a complete breakup of the business when all the partners (shareholders) go their separate ways - assets are sold, bills are paid, and the remaining assets are equitably disbursed to the partners. Often it occurs when one or more partners leave the company to start their own business or to enter into a subsequent partnership agreement with others. When the latter is the case, the dissolution of the original partnership often results in legal dispute.
Questions commonly arise regarding breach of contract, breach of fiduciary duty, unfair competition, the rights of shareholders, as well as over the terms of any partnership buyout.
The Partnership Contract
Whether created by a comprehensive written agreement or a handshake, business partnerships exist under a contract. That contract conveys certain rights, duties, and obligations of the partners, either expressed or implied. Foremost among these is that all the parties (those leaving the partnership and those remaining) have a fiduciary duty to always act in the best interests of the business, the shareholders (individual partners and/or stockholders), and the clients.
Breach of Contract
When a partner or partners decide to leave, it may constitute a breach of contract insofar as they fail to perform the oral or written terms of the partnership contract without legal excuse. Such terms extend to the employment contract. This is the implied covenant to act in good faith and deal fairly with the other partners. The employment contract may also cover an expectation to produce revenue while building and protecting the reputation and good name of the business.
Breach of Fiduciary Duty
Partners have a fiduciary duty to duty means to act in the best interests of the partnership, corporation, stockholders, and even clients. A breach of fiduciary duty may be claimed insofar as it can be shown that any breach of contract damages the business. Examples include, but are not limited to: loss of reputation and goodwill, unfair competition, lost of clients, acts incurring business debt or legal liability, and the lost promise of future earnings. Both the business and the individual shareholder (partners) may have cause to take legal action in the case of a breach of fiduciary duty. Legal action to protect and benefit the shareholders is called a derivative action.
Disputes over the terms of partnership buyouts may be the most contentious of all. This is particularly true for partners who did not have the foresight to include the terms of a buy/sell agreement in their original contract. These agreements typically hold the answers to questions like:
· Must a partner be bought out?
· What valuation will be given for the departing partner's interest and how is it calculated?
· Who is entitled to buy the departing partner's portion of the business? (i.e. Is a buyout limited solely to partners or does it include outsiders?)
· What events may trigger or preclude a buyout?
Competition / Loss of Goodwill
The damage may be substantial, for example, when the departing partner takes existing clients away or enters into direct competition for future clients and revenue. Moreover, by depriving the business of their good name, reputation, and association, the departing partner may damage the goodwill value of the business. The damage is twofold, resulting in both a loss of assets and a diminished share of the remaining business value for the other partners (shareholders).
Finding Answers to Your Partnership Questions
Equitable answers to these questions, and others, are rarely straightforward and seldom easy. To act in the best interests of the business, the shareholders, and clients, the prudent course of action is for partners to seek expert legal guidance and assistance in ending a partnership agreement.