Often we are contacted by people who are owners of businesses when they are having a dispute with another owner. People reach out to us in order to attempt to better understand their options to either force a change in their co-owner’s conduct, or end the business relationship. If ever there is a time when we are forced to give the classic lawyer answer of “it depends,” it is in these types of disputes.
So what does it depend on? The short answer is: a lot of things. However, we typically start by looking at three factors. The first factor is the type of business entity (generally partnership, corporation, or limited liability company). Second, we want to know whether there is a written agreement governing how the business is to be operated (partnership agreement, shareholder agreement, or operating agreement). Finally, we want to know how the business is doing financially (this will dictate whether we suggest working to continue operating the business, selling the business, or dissolving the business).
The type of business is important because there are different, although often similar, rules, laws, and considerations that must be taken into account depending on whether your business operates as a partnership, corporation, or limited liability company. This factor is the starting point in our analysis, it is generally readily discernible, and in many ways it serves as the foundation of how you approach a dispute with another owner of the business. However, the analysis only begins here, there are many other considerations.
Perhaps the most important piece of information we look for in analyzing a dispute amongst business owners, once we have determined the type of entity, is whether there is a written agreement governing how the business is to be operated. These agreements, whether partnership agreements, shareholder agreements, or operating agreements are contracts amongst the business owners. Thus, they are interpreted and applied in generally the same way as other business contracts in North Carolina. Well drafted agreements will typically address how disputes are handled. They may contain a mandatory mediation or arbitration clause. Alternatively, the agreement may spell out a clear path for what must happen if an owner wants to leave, or if an owner wants to force their co-owner out through a buyout. Finally, these agreements will tend to support, or undermine, a theory that your co-owner has failed to fulfill his obligations in the business.
If the business has been operated without a written agreement, then North Carolina Statutes, drafted by the legislature, will dictate how disputes are handled. The statutes tend to be broader than a written agreement, so we always encourage business owners to develop a well drafted agreement that will dictate how the business is to be operated.
Knowing how your business is doing financially is important to us, because if the business is failing, it may make the most sense to simply cut your losses and shut it down. However, if the business is doing well, and it has assets, we will need to work through your options for continuing the business, buying out your co-owner, demanding a buyout, or requesting that the business be shut down and the assets distributed. In other words, we really need to know whether there is anything to “fight over” before we advise you on how to proceed. Unfortunately, if the financial situation of the business is particularly dire, we may have no choice but to suggest you contact bankruptcy counsel.
As should be apparent from this post, there are a number of considerations, which extend far beyond the three discussed here, that must be analyzed when you find yourself in the unfortunate situation of having a disagreement or series of disagreements with a co-owner of your business. If you are having such a dispute and would like to speak with an attorney who has helped others navigate these problems in the past, we would be more than happy to speak with you.