Most businesses start with people getting together to pool their experience and resource, thus creating a new enterprise. Ideally, these businesses will continue to run and grow without any problems. Sometimes, however, one partner may not be working out for whatever reason, and the remaining partners want to remove them. In this article, we will discuss the legal implications of forcing a partner out of the partnership.
Look To The Partnership Agreement
Ideally, before entering into a partnership, a partnership agreement was drafted by an experienced, competent attorney. The partnership agreement should include the process of forcing a partner from the partnership and under what circumstances. If there is no partnership agreement or the agreement leaves out forced removal, then the partners must negotiate a buyout.
Negotiate A Buyout
A buyout is when the remaining partners buy out the shares of the partner they wish to remove. If done equitably, then a buyout can be an amicable solution that helps avoid a lengthy or costly legal dispute.
How To Determine An Equitable Solution?
To determine an equitable solution, the business, a neutral third party, needs to assess the value of the company. The partners will have to agree on the evaluation process. Ideally, the partnership agreement outlines this evaluation process. If it is not in the partnership agreement and the partners cannot agree on an equitable solution, the business may end up in a court dispute.
What If the Partners Cannot Negotiate a Buyout?
If the exiting party and the other partners cannot negotiate a buyout, then the remaining partners still have the option of doing a formal removal. A partnership agreement or the corporate bylaws should outline how this procedure works. The most common method is for the partnership to call a vote for removal where a majority vote will carry the day. If the partnership agreement or corporate bylaws are silent as to the removal process, then the business may use mediation or petition the court to intervene.
In mediation, an unbiased third party tries to bring the parties to a just resolution. The mediator’s goal is to get the various sides talking and try to develop an equitable solution that all parties can agree with. If the parties accept the mediator’s proposal, that resolves the issue. If mediation fails, then the partners can petition the court.
Petitioning The Court To Intervene
Petitioning the court to intervene in a partnership dispute can be a costly endeavor. The court will only consider removing the partner if there are issues of wrongdoing that will need to be proven by the remaining partners. Since the courts have leeway and their verdicts are final and enforceable, the results might not be what the partners have hoped for and should exercise caution.
When creating a partnership, it is crucial to have an agreement that considers every possible scenario. If no such agreement exists, then an experienced law firm, such as Dowd Law, should be consulted to protect the interests of the partnership and ensure the survivability of the business.