Our San Diego business lawyers have previously written about corporate governance and compliance issues and the many benefits to business owners of addressing their Company’s corporate compliance. In this article, we focus on another reason to engage in best practices when it comes to corporate governance—Partnership Disputes and How to Avoid Them.
Many clients contact our business litigation attorneys after a dispute arises. When that happens, the costs and stress of resolution, including possible litigation, can mount. Here are some relatively simple and cost-effective measures to help you avoid a partnership dispute down the road.
Planning to Avoid Partnership Disputes
As an initial matter, if you have either no agreement, or one that is silent about how, where and when disputes are resolved, you and your partners will be left to resort to the remedies and relief offered by the various California statutes and case law that govern partnerships in this State. Unfortunately, in most cases, the relief and remedies provided by statute are relatively weak, “one size fits all” provisions designed to provide a minimum standardized set of rules. In contrast, our business law attorneys are adept at preparing customized remedies and processes you and your partners can agree to from the outset, those which clearly define how you want the business to operate and how you will resolve any disputes which may arise. If the partners haven’t agreed to such terms beforehand, then once there is a disagreement, resolution is often hard to come by and costly litigation is more likely. Therefore it is imperative that you plan ahead for disputes.
As we all know, most relationships between people, whether family, friends or business partners, will involve disagreements now and then. It is a reality that is easy, but potentially expensive, to overlook in business. If business owners accept this reality and commit to determining how partnership disputes will be resolved from the outset, they will be driving the train and not vice versa. For instance, the partners should discuss the possibility of including mediation or arbitration provisions in their governing documents, whether that includes an Operating Agreement, Partnership Agreement, Shareholder Agreement, a Buy Sell Contract, or a combination of governing documents. Mediation and arbitration are typically far more cost-effective options than litigation. Without mandating this resolution in a dispute in governing/formation documents there will be no requirement for the parties to engage in alternative dispute resolution.
Other important issues to discuss in the planning phase include what will happen in the event one of the key owners becomes unable to perform his or her obligations to the business partnership, or decides to sell their interest in the business. If your business’ controlling documents don’t provide a roadmap to address these and other common issues, then you could end up with a new partner in the business that you can’t work with, don’t want to work with, or even worse, one who’s interests are not aligned with the well-being of the business. Many business partnerships have failed because of completely foreseeable events simply because the partners did not plan for worst case scenarios.
One additional consideration your business law attorney may recommend that you address includes how to value shares or partnership interest in the company. The governing documents can be very detailed at assisting partners in determining how their interests will be valued when it comes time to sell or transfer them, without having to resort to a lawsuit. This could include language providing non-selling partners, or the partnership itself, with a right of first refusal to purchase a selling partner’s interest.
Hiring an Experienced Business Law Attorney to Avoid Partnership Disputes
Once you have started thinking about and discussing your options for addressing your partnership issues, it is in your best interest to hire an experienced business law attorney to help you reduce your agreements to writing, in order to ensure they are legally enforceable and meet your company’s particular needs. The key to lasting continuity of your company’s operations, and its continuing success, often lies in well-drafted legal documents, from Partnership Agreements, Operating Agreements, Shareholders Agreements, Buy/Sell Agreements, or other documents as your company’s needs dictate.
Then, if disputes arise, as they often do, the partners can look to these documents for guidance; they should inform the owners of the process by which they are bound to resolve their disputes, for example mediation and arbitration, as we previously referred to. Our business law attorneys usually do recommend mediation provisions, at a minimum, as well as language that permits the prevailing party to recover their attorney’s fees and costs in the event of a dispute. Without them, potentially destructive litigation is often the result.
In summary, planning ahead for partnership disputes is what business lawyers are trained and experienced in handling. Put our experience and knowledge to work for you and let us help you avoid a costly partnership dispute. Feel free to contact our business lawyers for a free evaluation or browse our website for more information.