What Are Your Options in a Business Partner Dispute?

Most business partner disputes end in one of three ways: one owner buys the other out, the owners negotiate a split or a sale of the company, or a court decides. Which path is realistic depends mostly on documents signed long before the fight started: the operating agreement for an LLC, the shareholders’ agreement and bylaws for a corporation, or the partnership agreement. Before anyone changes passwords or moves money, read those documents, because acting outside them is one of the fastest ways to turn a disagreement into a lawsuit you lose.

Our commercial litigation and dispute resolution attorneys handle partnership, shareholder, and LLC member disputes from the first negotiation through trial. The same questions come up in almost every case.

Start with the governing documents

Look for these provisions:

• Deadlock resolution: what happens when equal owners cannot agree, such as escalation, mediation, a tie-breaking vote, or a forced buyout. Our post on breaking a deadlock between 50/50 owners walks through each mechanism.
• Buy-sell terms: the triggers (death, disability, departure, deadlock, breach), the valuation method, and the payment terms.
• Shotgun clauses: one owner names a price, and the other must either sell at that price or buy at it.
• Transfer restrictions and rights of first refusal.
• Removal of managers or officers, and the vote required.
• Dispute resolution: mediation, arbitration, venue, and governing law.

If there is no written agreement, or it is silent on the issue, the state’s default rules apply. Those defaults are often a poor fit for a closely held business, which is why owners should sign a real agreement while they still get along. Our corporate governance and internal policies team drafts those provisions at formation or after a near miss.

Know what each owner owes the others

In most closely held businesses, the people who manage the company owe fiduciary duties: a duty of loyalty (no self-dealing, no diverting business opportunities, no competing with the company) and a duty of care. Many states let an LLC agreement modify these duties within limits, so their exact scope depends on your documents and your state’s statute.

Owners also usually have statutory rights to inspect the company’s books and records for a proper purpose. If you have been shut out of financial information, a written records demand is often the first formal step, and a refusal can support a court order.

Claims in a partner dispute come in two kinds. Direct claims belong to you personally, such as a breach of a buyout obligation owed to you. Derivative claims belong to the company, such as a partner diverting company funds, and generally must be brought on the company’s behalf, often after first demanding that the company act. The distinction affects who recovers and which procedural steps come first.

Realistic paths to resolve a partner dispute

Negotiated buyout

The most common outcome. The hard part is price. Agreeing on a valuation method and an independent appraiser often does more than arguing over a number. Payment terms matter too: a seller financing part of the price wants security, and a buyer wants protection against liabilities that surface later.

Mediation

A mediator can be especially useful between partners, because personal history often blocks rational negotiation. Our post comparing mediation and arbitration for business disputes explains how each process works.

Litigation or arbitration on specific claims

Claims for breach of fiduciary duty, breach of the operating agreement, or an accounting can be filed in court, or in arbitration if the agreement requires it. Many of these cases settle once discovery puts the financial records on the table.

Judicial dissolution

As a last resort, an owner can ask a court to dissolve the company. The LLC statutes in Virginia, Washington, DC, and New York each allow a court to order dissolution when it is not reasonably practicable to carry on the business in conformity with its governing documents, and corporate statutes offer similar remedies for deadlock or misconduct. Courts treat dissolution as drastic, and the prospect of it often pushes the parties toward a buyout.

Protect the business while you resolve it

Disputes can destroy the value both owners are fighting over. Keep paying vendors and employees, tell customers only what they need to know, and avoid unilateral moves such as locking a co-owner out of bank accounts or email unless the governing documents and counsel support it. Preserve records, since both sides’ emails and texts will matter, and document major decisions with proper approvals. If you need to send your partner a formal notice of breach, the principles in our guide to breach of contract demand letters apply.

Timing matters as well. Claims against a co-owner are subject to limitation periods, and waiting for the relationship to improve can cost you remedies. A short review of your agreements and the facts early on usually clarifies which path makes sense.

If you are in a dispute with a co-owner and want to understand your options before you act, Capitol Law Partners can review your agreements and map a path to resolution. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Sena Sahin. Clear advice for individuals, families, and business owners.

Need help with this topic? See our partnership and shareholder dispute page or schedule a consultation.