As an experienced Media Business Lawyer, clients come to me all the time with questions regarding how to split from your business partner. The first thing you want to do is take a look at your corporate formation documents either the type of partnership that your company is, a corporation or an LLC, limited liability company and see what the documents say with regard to termination of the relationship. If the documents contain, and these types of documents can be a buyer/seller agreement, confidentially agreement, shareholder agreement, employment agreements, a whole list of agreements. These agreements you and your partner have entered into during the course of the life of the company. At that point in time, we look into those documents and we say, “What do they provide when one member wants to leave, either voluntarily or involuntarily?” That becomes the key.
As a dedicated Media Business Lawyer I would say, the key first step is what my documents say with regard to when I started this company. The next question you have to ask, and this is always going to change from question to question, is if this is a voluntary dissolution, voluntary arrangement, or are you on friendly terms and do both of you agree you want to split. If that’s the case, it becomes a lot simpler than it does if it’s a disagreement. The first thing you want to do with that is to divide the company voluntarily by saying I accept certain assets and you accept certain assets, we pay off all the debts and at that point in time we hopefully have a large sum of money left over after everybody has walked away. If both parties are going to dissolve, then that’s the way to do it. You get an evaluation of the company and agree to split up the assets or sell the assets, pay off your debts, and then walk away.
If, however, one member wants to stay and another wants to leave, then it becomes a little more difficult because at that point in time you have to negotiate the exit plan. One of the factors that come into agreement after you’ve looked at your documents and if the documents show how the break should happen then you follow that. If there is no document in place, you enter into a series of negotiations with your exiting member to say, “I think the company is worth XYZ and your percentage is 45%.” At that point in time we arrange to see how we’re going to evaluate the full company value and then arrange to see how your 45% is going to be paid. At that point in time, the difficulty from the exiting member’s point of view is am I going to get paid, how am I going to get paid, and on what terms am I going to get paid, either cash in a lump sum or in a payout.
Then you have to evaluate the values and arrive at what they are, as well as the liabilities. Then you end up with a net equity and you apply the 45% to allow the value to be determined. This can be either done by an appraisal, it can be done by an agreement of the parties where they say okay we think the company is worth XYZ and we agree on that number and move forward with it. From the exiting member’s point of view, it’s how I’m going to get my money and how am I going to get paid, what terms over time am I getting paid, and what security do I have if I don’t get paid. Do I get my company back or do I have some other remedy to get to my money?
From the member who is staying in the company, his problems or his concerns are how do I pay my exiting partner, do I pay him out of my corporate funds? Do I go to the bank and borrow against that? Do I pay him on a monthly basis on a payout or can I afford to lump sum it? The concern will from the exiting partner is I want my money now and I want my money as soon as I can. From the company’s point of view and the remaining partner is can I afford to pay him based on what I have left after he leaves? You have that negotiation take place. If, at some point in time, that is agreed upon, then it’s very simple. You enter into an agreement that says this is how I’m going to do it. I’m going to give you my shares; I’m going to give you my membership in exchange for an agreement. It’s incorporated into an agreement. That agreement, from the exiting partner’s side is my security, my payment terms, and what can I do after I leave the company.
From the remaining member’s point of view, his thought process and his concern is how do I make sure I can afford it, pay it, and make sure that Joe, my exiting partner, doesn’t open up across the street and start competing against me because he’s changed his mind the minute that he walks out of the company. The way we do that is with certain covenants with regard to his ability to compete, his ability to keep customer lists; we keep the customer list private, and the trade secrets of the company. We would incorporate that into the exit agreement. At that point in time, that existing member can no longer compete for a reasonable period of time in that business or for a reasonable distance from my business. Once you’ve got that into an agreement, then you’re set.
The second step is what if this is involuntary. One guy wants to leave and the other guy says I don’t want to leave. The key questions there are to come back to your documents. How do I get a withdrawal of a partner either by forcing him out or is there an option in the agreement that if one of us decides that we want out then we can buy the other fellow out under those terms? If you don’t have an agreement, it becomes more of a corporate struggle. The corporate struggle then revolves around who controls the company. Do I, as the guy who wants my exiting partner gone, control 51% of either the voting stock, membership interest, partnership interest, or whatever it is and then do I have the ability to do certain things within those documents?
Your caveat or your concern is that you, as the member who wants to force your partner out, much act with a duty of loyalty to him and a duty in the best interest of the company. If you do that, then you may be in violation of that and be responsible for certain damages if you force him out unlawfully or against the terms of your agreement. Once you’ve determined you’re in control, then you can do certain political things, for lack of a better term. You can increase your own salary, you can increase the shares of stock that you own, you can decrease his salary, you can take away some of his goodies, his car, his life insurance provisions, and things like this that are paid for by the company but would no longer be paid for by the company because you’re not going to give him that benefit. The concern at that point is that then you’ve put him in a situation where he doesn’t really want to stay.
That’s all based upon your control. If you don’t have that control or it’s a 50/50 proposition, then you are in a much more difficult situation. That is, I can’t force him to lower his salary, I can’t control the company to increase my salary, I can’t add more shares, so then I have to resort almost to litigation at that point if he’s not going to voluntarily do it. At that point you then must go to court and get into a shareholder’s dispute over control. That is the least of your options because that becomes extremely expensive and is not of any benefit because you are paying the lawyers and not paying yourselves. We would try to avoid the last event of litigation.
If, however, you are the minority member, at that point in time you can, if the majority member is imposing certain restrictions on you, you can go to court and sue him for oppression, breach of his fiduciary duty or his duty of loyalty. At that point in time, you are trying to force him to give you a higher price. The bottom line with regard to the involuntary dissolution is if one partner or one member has expressed the interest no longer to be partners with the other one, it’s kind of like a divorce. If one says I want out, then you really shouldn’t be fighting over it and you should try to reduce your expenses and reach an amicable agreement that is in the best interest of all the parties to get the assets secured, the liabilities paid off, and you go your separate ways. I hope that is of some help to you in resolving your differences.
If you have any questions about how to split with your business partner, please contact our Media Business Lawyers for a free case evaluation.
This educational blog was brought to you by experienced Media Business Lawyer Walter J. Timby. Our law firm proudly represents clients throughout Media, as well as Pennsylvania, Delaware and New Jersey.