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How to Break Up With Your Business Partner

Entrepreneurs start their businesses with ambition and optimism.  But many business partners fail to plan for the possibilities of a dispute between the partners, eventual exit strategy, or a business breakup in Wisconsin.  Absent such planning, Wisconsin business owners face risks that not only threaten their professional relationships but also threaten the partner’s entire investment.

Business Divorce: The Spurned Spouse Phenomenon

Statistically, over 60% of business owners will break up with their business partners at some point. Business breakups are often called business divorces and with good reason.   Emotions in business breakouts can run high, former lifelong friends can become adversaries. It is not uncommon for things to escalate if a partner feels that he or she is being rejected, counterclaims and breach of fiduciary duty claims can be asserted.  Such claims may jeopardize the company’s assets if made recklessly.

How To Resolve A Business Partner Dispute Without Litigation

Litigation is expensive.  In addition, litigating a partnership dispute can have a negative effect on the value of company since the company’s “dirty laundry” is aired in a public forum. Resourceful business owners can attempt to resolve their partnership through a negotiated resolution.

You Can Change the Partnership Agreement

The source of many business partner disputes is that one partner may feel like he or she is doing the majority of the work.  If you resent that your partner is sharing equally in the profits but is not contributing as much effort to making the business as the success, one solution may be to change the percentage of how profits are split.  Depending on the circumstances, this may be a viable option to resolve a partnership dispute.

You Can Buy your Business Partner Out  

If you would like to continue the business but do so without your partner, you can attempt to buy out your partner.  This will allow you to continue running the business without interruption.  You will want to seek professional guidance when buying out a business partner because you will need to value the business and work out the terms.

Liquidate and Dissolve the Business

Often a “clean break” is the best option for many business partners. The cleanest way to break up from a business partner is to end the business.  To do so, the business pays off its creditors and then liquidates its assets. Any money left after the liquidation is paid back to the partners pursuant to their percentage of ownership.

What if One Partner Doesn’t Want to Breakup

Sometimes a business partner might not agree to voluntarily end the business. Alternatively, your business partner might want to continue the business without you.  This can be especially problematic in a closely held corporation. A closely held corporation’s distinguishing features is that control of the entity is shared by just a few individuals.  This characteristic, however, makes closely held corporations particularly vulnerable to business disputes, shareholder disputes, and manager deadlock.

As an example, what happens in a closely held corporation if the owner wants to sell the business to a third party and the other owner does not?  In such circumstances, deadlock would arise because the business partners have a fundamental disagreement on an issue that would require a majority vote. If the owners are unable to resolve their deadlock and disputes, the situation can escalate to the point where one partner files suit to exercise their legal remedies.

The Importance of Operating Agreements and Shareholder Agreements

To prevent shareholder disputes and managerial deadlock in closely held corporations a well-drafted shareholder agreement and operating agreement are of critical importance.  A buy-sell provides a mechanism in which a dissatisfied owner can exit the company by selling his or her ownership. A buy-sell agreement is a binding contract between co-owners that control when owners can sell their interest, who can buy an owner’s interest, and what price will be paid. These agreements come into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies. In other words, a buy-sell agreement functions as a sort of prenuptial agreement between business owners and guide the process for owners to buy each other out of the business.

Litigating A Business Breakup

Unfortunately, many businesses do not have operating agreements or buy-sell agreements.  In such circumstances, where the partners were unable to negotiate a resolution, the dissatisfied shareholder can go to court to petition for a “judicial dissolution.”  Under Wisconsin law, an owner may seek an involuntary dissolution that is imposed by the Courts.

Judicial Dissolution of a limited liability company

The Court may order the dissolution of a Wisconsin LLC if any of the following is established that:

  1. It is not reasonably practicable to carry on the business of the limited liability company.

  2. The limited liability company is not acting in conformity with an operating agreement.

  3.  One or more managers are acting or will act in a manner that is illegal, oppressive or fraudulent.

  4.  One or more members in control of the limited liability company are acting or will act in a manner that is illegal, oppressive or fraudulent. That limited liability company assets are being misapplied or wasted.

Wis. Stat.  § 183.0902.

Judicial Dissolution of a Wisconsin Corporation

The Court may order dissolution of a Wisconsin corporation on an action brought by a shareholder if any of the following is established that

  1.  The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock and, because of the deadlock, either irreparable injury to the corporation is threatened or being suffered or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally.

  2.  Directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent.

  3. shareholders are deadlocked in voting power and have failed, for a period that includes at least 2 consecutive annual meeting dates, to elect successors to directors whose terms have expired or would have expired upon the election and, if necessary, qualification of their successors.

  4.  The corporate assets are being misapplied or wasted.

Wis. Stat. § 180.1430.

For both LLCs and Inc.’s, the Court has a wide range of discretion on how to proceed because judicial dissolution proceedings are equitable in nature. Nevertheless, a circuit court’s equitable authority is circumscribed by the statutes, and a court erroneously exercises its discretion if it orders relief in contravention of the statutes. Bushard v. Reisman, 2011 WI 51, ¶45 n.16, 334 Wis. 2d 571, 800 N.W.2d 373.

Although most judicial dissolution claims ultimately end in a negotiated settlement, when litigated to conclusion, the Court will order the company to be liquidated and dissolved if the grounds for doing so are proven.  The Court will usually appoint a receiver to collect and dispose of the company’s assets, pay the creditors and then dissolve the company.

 Conclusion

Shareholder conflicts that result in deadlock pose challenges for Wisconsin businesses. Advance planning and careful drafting of shareholder agreements may reduce the likelihood of shareholders in a closely held corporation becoming deadlocked, and in the event of disagreement, provide a mechanism for an orderly resolution as opposed to a judicial dissolution. If a dispute develops, business owners would be wise to hire legal counsel to guide them through their options.

 

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