Most people start businesses with people they know and like; such as, friends, relatives and business associates. Unfortunately, at some point, conflicts among the owners will arise, whether they be a result of the personalities involved, differing business philosophies or issues related to the performance of an owner or the company overall. While many of these conflicts are successfully sorted out by the owners, sometimes they can’t be resolved and become detrimental to the business and its operations. When this occurs, it is not uncommon that the only plausible resolution is that one or more of the owners must exit the business.
When proper formation documents and exit planning strategies are utilized at the beginning of a business relationship, the exit of a business owner can be relatively smooth and without serious disruption to the business. The utilization of documents such as Buy-Sell Agreements for a corporation, or exit provisions in an Operating Agreement of a limited liability company or in a Partnership Agreement for a limited or general partnership, are crucial and, if drafted properly, provide for the orderly removal of an owner and buyout of their ownership interest in the company based on a pre-determined formula or valuation method.
However, where an exit strategy is not agreed upon in advance and/or not properly documented, problems arise. Typically, the highest ranking officer (usually the President or CEO) has the power to terminate the employment of a problem owner, which removes that owner from the day-to-day operations of the business. But this alone will not remove the owner from all facets of the business because an owner often wears several hats; i.e., owner (shareholder, member or partner), officer, director, and employee. As a result, each of these roles carries distinct legal rights and duties that must be dealt with separately.
Thus, a careful analysis of an owner’s role in the company is needed to determine what other positions such owner holds and the steps legally required to remove the owner from each position. For example, an officer serves at the pleasure of the Board of Directors and can only be appointed and removed as an officer by the Board of Directors. Likewise, directors are elected annually by a majority vote of the shareholders and can only be removed by a vote of the shareholders (keeping in mind, however, the rules governing cumulative voting, which may result in a director who also owns a sufficient number of shares being able to retain his or her seat on the Board of Directors). Alternatively, a director may be removed by court order, but this is a costly and time consuming alternative that is not viable from a practical point of view.
Finally, even if you are successful in removing a problem owner as an employee, officer and/or director, thereby removing that owner from the day-to-day operations of the company, that individual remains an owner unless their ownership interest is bought out. Absent a contractual obligation to submit to a buyout, there is no way to force the buyout. Therefore, having the proper documentation in place before a problem arises is critical to a smooth transition when a problem arises.
If you have a problem co-owner who is disrupting your business or making it difficult to operate the business, or, if you find you are being unfairly forced out of your rightful ownership interest in a business, contact our experienced owner dispute attorneys to help you understand your rights, duties and obligations, and to assist you in negotiating a smooth transition to help keep the business running with minimal disruption. Please call 858-793-8090 or complete the contact form for a consultation.