Joint businesses and/or partnerships do not always work out. When assets are combined, there can be varying disagreements on the management of the business, allocation of resources and personnel, shareholder control among a host of other aspects. Businesses can start off with the best of relationships and intentions, but can over time, decay into disputes from the minor to the major. In some instances, disputes can arise from simple carelessness or innocent mistakes. In others, officers, directors or shareholders may be liable for intentional mishandling, misallocation or outright fraud as against other shareholders.
Our firm has handled numerous business unwinds, from the innocent to the fraudulent, in both litigation and pre-litigation negotiation. While it is always preferable to resolve a matter prior to, or shortly after filing litigation to avoid seemingly never-ending attorneys’ fees, depending on the stakes of the parties and the nature of the business, litigation may be the only way out. While Courts might not want to force unhappy partners to continue doing business together, Courts may not want to dissolve a profitable business that may perhaps be improved going forward. We have handled cases for both minority and majority shareholders looking to protect their investment and/or income short and long term.
A common problem amongst shareholders in our experience has been “self-dealing.” Self-dealing arises when a managing party i.e. one who has supervision or control over company assets and operation mishandles his duties or money. The situation may continue for months or years unbeknownst to the victim-shareholder. If caught in time, assets may be sought to be preserved until a Court determines who gets what. One of the many causes of action for an aggrieved shareholder is an accounting. This action seeks the Court to require the controlling party to “open the books” to the complaining party and explain how the assets were used and how profit distributions were made.
Our firm has found most effective an immediate motion to appoint a receiver and freezing of assets of a company pending court decision. Even if unsuccessful, such a motion brings the parties to the negotiating table immediately before the hemorrhaging of attorneys’ fees begins.
The victimized shareholder’s claim may be based on a written or oral agreement, such as a partnership agreement, a shareholders agreement or a joint venture agreement. But it may also be based on duties imposed by law even in the absence of an agreement. For example, partners owe each other a fiduciary duty, which when breached give rise to a cause of action. Similarly, the majority shareholder owes the minority shareholder a fiduciary duty which will support a claim.
Another common problem is where one of the contributors to a business tries to characterize his investment as a loan rather than an investment. For example, if A and B pool their money to start up a business, and the business becomes valuable, A may try to characterize B's investment as a loan and try to limit his or the company's liability to repayment of the loan. By the same token, if the business becomes worthless, A may try to characterize his investment as a loan, and demand repayment of the loan rather than having a worthless interest in the business.
The most extreme remedy in a partnership dispute is dissolution i.e. a Court order disbanding he business and distributing what’s left. Court’s are typically loathe to unwind a profitable business. However, dissolution may be the only remedy available if there are truly irreconcilable differences.