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Friction or Non-Friction? How to Handle Business Partner Disputes and Other Conflicts

While business is flourishing across resurgent metro markets nationwide, change invariably brings with it a certain degree of turmoil. From minor growing pains to more profound professional conflicts, some companies are more equipped to handle success, and challenges, than others.

When it comes to setting up business partnerships or handling business partner disputes, it is critically important to know how to move forward in a responsible manner–protecting both the health of your business and your own interests in the process. Business owners, (be it shareholders, members or partners) and entrepreneurs should understand the basic principles of how to properly set up a business partnership agreement, should be familiar with common strategies for maintaining a healthy business partnership; and, if necessary, should know how to effectively dissolve the relationship that is no longer working. Similarly, it makes sense to familiarize yourself with the warning signs of an impending breakup, and, if a business divorce is inevitable, to know what to expect and how to mount the best possible defense.

As with so many endeavors, much of the hard work involved in setting up a strong professional partnership is performed ahead of time. Establishing a clear and comprehensive partnership agreement (or analogous document such as an operating agreement or a shareholder agreement) is paramount. Clarifying the basics, including who is control of the business and outlining the responsibilities and expectations of the different parties involved in the enterprise, is just the beginning.

It is almost impossible to draft a founding document that adequately addresses the best interests of both the entity as a whole and the underlying owners without first taking into account the different goals, objectives, priorities and concerns of all potential stakeholders. Legal counsel can be extremely beneficial at this stage of the proceedings, but it is critically important to clarify who an attorney is working for: is the attorney representing the organization, or one or more of the owners?

Consider worst-case scenarios. Keep in mind that, in a crisis or dispute, these documents will become critical. What happens if you or another partner leaves the company? What happens to the company (and to dependents) in the event of serious illness or death? Before trouble appears is the time to establish buyout mechanisms and determine how the assets of the business will be valued if a business divorce is required. If a contentious situation arises, what forum will be used to resolve the issue? A key priority here is to avoid future deadlock, where competing preferences and a procedural standoff makes resolution impossible. Corporate law dictates that there is very little that can be done in that situation other than dissolve the company. Consider selecting an independent, trusted and mutually agreed-upon third party to act as an arbitrator–and indemnify that individual to protect them against retribution.

As a general rule, business owners and operators should be cautious about making someone an owner. The legal obligations that are owed to an owner/partner are exponentially more significant. Instead, consider offering deserving employees more compensation, or other benefits/bonuses tied to the company other than equity.

The list of tips or best practices for maintaining a healthy business partnership is not so different from those that are important in a marriage (professional breakups are called “business divorces” for a reason). That list includes things like clear and consistent communication, full disclosure, honesty and mutual respect.

One common factor we see in many business breakup cases is a single person handling all the financial responsibilities. Good financial reporting and transparency is vitally important: trust but verify. Monetary questions or inconsistencies, such as unanticipated cash flow problems that cannot be easily explained, are among the most common warning signs that someone is using company resources inappropriately or acting against the interests of the organization. A lack of attentiveness to the business is another red flag. Waning dedication to the business oftentimes means that the individual is directing their energies elsewhere.

The most practical way to dissolve a business partnership that is no longer working is to utilize a previously agreed upon method for valuing the business and have one party buy out the other. This is typically a better solution than breaking up the business, where paying creditors and recovering monies owed from clients can both become a significant challenge.

Ideally, you want to contact a trusted business attorney before issues become truly contentious. To that end, be proactive about seeking legal counsel as soon as you suspect there are issues. The more ironclad your proofs are before you initiate a confrontation, the better positioned you will be for any future litigation and the more likely you can push for a speedy resolution. The rules of evidence gathering and the realities of human nature dictate that some evidence may be more difficult to find (or may even disappear) once litigation commences. Bear in mind that there is no legal expectation of privacy in the workplace, making email searches, server access and financial records reviews a potentially viable pre-litigation tactic.

Finally, make sure that you work with an attorney who has demonstrated experience in this highly specialized arena, and who understands corporate law and forensic accounting. Many lawyers claim to be business lawyers, but far fewer have drafted and litigated the critically important documents at the heart of these disputes. In perspective, if you need heart surgery, you don’t want a general surgeon–you want a cardiac specialist.

This post written by Ken Neuman was originally published in Corp! Magazine. For more information about handling business partner disputes or other conflicts, please contact Ken Neuman at kneuman@nagmlaw.com