Question 1

What are common causes of disputes between business partners?

Accepted Answer

Partner disputes frequently arise from disagreements over business direction and strategy, unequal effort or contributions, compensation and profit distribution disputes, allegations of self-dealing or diversion of opportunities, management deadlock when partners cannot agree, one partner wanting to exit while others wish to continue, financial difficulties or business underperformance, and lack of clear agreements addressing decision-making and exit procedures. Many disputes could be avoided with comprehensive partnership or shareholder agreements addressing these issues upfront.

Question 2

What is shareholder oppression and what remedies are available?

Accepted Answer

Shareholder oppression occurs when majority shareholders or those in control act in ways that frustrate the reasonable expectations of minority shareholders, such as excluding them from management, terminating their employment, refusing to pay dividends while paying excessive salaries to controlling shareholders, or diluting their ownership interest. Remedies vary by state but may include court-ordered buyouts at fair value, appointment of a receiver, dissolution of the company, or damages. Courts look at the specific relationship and expectations of the parties, often formed when the business relationship began.

Question 3

How are business valuations conducted in ownership disputes?

Accepted Answer

Business valuations typically use one or more approaches: income-based methods (discounting projected cash flows or capitalizing earnings), market approaches (comparing to similar company transactions), and asset-based approaches (valuing company assets). The appropriate method depends on the business type, industry, and purpose of the valuation. Disputes often involve whether to apply discounts for lack of marketability or minority interest. Valuation experts play crucial roles in litigation, and different experts often reach substantially different conclusions. Understanding valuation principles helps in settlement negotiations and trial preparation.

Question 4

What should a partnership or shareholder agreement include?

Accepted Answer

Comprehensive agreements should address ownership percentages and capital contributions, profit and loss allocation, management responsibilities and decision-making authority, compensation including salaries and distributions, transfer restrictions and rights of first refusal, buyout provisions triggered by death, disability, termination, or voluntary departure, dispute resolution procedures, non-competition obligations, and procedures for deadlock resolution. Well-drafted agreements anticipate potential conflicts and provide mechanisms for resolution, often avoiding costly litigation. Review and update agreements periodically as circumstances change.

Question 5

What is a derivative lawsuit and when is it appropriate?

Accepted Answer

A derivative lawsuit is brought by shareholders on behalf of the corporation to remedy wrongs done to the company, typically by directors, officers, or controlling shareholders. Any recovery goes to the corporation rather than the plaintiff shareholder. Before filing, shareholders must usually make a demand on the board to take action or demonstrate that demand would be futile. Derivative suits often involve breach of fiduciary duty, self-dealing, corporate waste, or mismanagement. Courts scrutinize whether the lawsuit truly benefits the corporation or serves the plaintiff's personal interests.

Question 6

How can partners or shareholders exit a business when disputes arise?

Accepted Answer

Exit options depend on the governing agreements and applicable law. Common approaches include negotiated buyouts where one party purchases the other's interest, triggering buy-sell provisions in existing agreements (such as shotgun clauses), judicial dissolution when the business cannot function, involuntary buyout orders in oppression cases, selling the entire business to a third party, or mediated resolutions crafting custom solutions. Each option involves valuation issues, tax implications, and practical considerations about the business's future. An experienced attorney helps evaluate options and negotiate favorable terms.

Question 7

What fiduciary duties do partners owe each other?

Accepted Answer

Partners owe each other fiduciary duties of loyalty and care similar to those in the corporate context. The duty of loyalty prohibits self-dealing, usurping partnership opportunities, and competing with the partnership. Partners must disclose material information and act in good faith for the partnership's benefit. The duty of care requires reasonable diligence in managing partnership affairs. These duties cannot be entirely eliminated by agreement, though some jurisdictions allow modification. Breach of fiduciary duty can result in damages, accounting for profits, and equitable remedies. The nature and scope of duties may vary based on the type of partnership and specific agreements.

Partner and Shareholder Disputes

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