I Like My Business Partner, But…

19 Sep I Like My Business Partner, But…

By Gregory A. Dorsey •
I see it time and time again. Friends or colleagues share a vision for the next online craze, the premiere medical practice, the one restaurant that satisfies the palates of all, the hair salon of choice, or the best local general contractor. Whatever the envisioned business, the initial vision rarely includes ensuring the business is formed to legally withstand the reality of the business lifecycle – at some point the partners (used generally to refer to an association of two or more persons to carry on as co-owners a business for profit) may find themselves embroiled in a legal dispute concerning the continued existence of the business partnership.

I am routinely engaged to lead a business partner through dissociation (a split) or defend a business partner (or the operating entity) against a threatened dissociation (a split). In either scenario, there are times when the entity structure (for example, a partnership, limited liability company, statutory close corporation, etc.) through which the business operates was not well thought out. There are also times when the organizational documents of the business, (for example, the charter, bylaws, operating agreement, partnership agreement, etc.) are in disarray and/or were prepared by the business partners, their accountant, a friend, or are an amalgamation of documents from myriad sources. My experience has proven it is equally important for individuals who desire to enter into a business relationship to ensure their entity structure and organic documents aptly deal with the end of their relationship as with the beginning – especially when the dissociation is hostile and litigation is the avenue by which we elect to resolve the dispute. Even if we are asked to negotiate an amicable resolution to the dissociation, the entity structure and organic documents are paramount to a favorable outcome.

For example, the statutory framework governing dissociating from a Maryland limited liability company (where the relationship between members is also governed by an operating agreement) affords remedies different than the statutory framework governing dissociating from a Maryland close corporation (where the relationship between stockholders is also governed by a unanimous stockholders’ agreement).

According to the Maryland Limited Liability Act, unless otherwise agreed, a member may withdraw from a limited liability company prior to the dissolution and winding up of the limited liability company by giving not less than 6 months’ prior written notice to the other members at their respective addresses as shown on the books and records of the limited liability company. Md. Code Ann., Corps. & Ass’ns, § 4A-605. If a person ceases to be a member of a limited liability company, and the limited liability company is not dissolved as a result, then, within a reasonable time after the person ceased to be a member, the limited liability company may elect to pay the person or the person’s successor in interest, in complete liquidation of the person’s membership interest, the fair value of the person’s economic interest in the limited liability company as of the date the person ceased to be a member, based upon the person’s right to share in distributions from the limited liability company. Md. Code Ann., Corps. & Ass’ns § 4A-606.1.

A number of questions emerge: What happens if the limited liability company elects not to pay the dissociating member the fair value of his or her economic interest or the parties disagree as to the monetary amount? In that circumstance, what rights, if any, does the dissociating member retain in the limited liability company? What if the business turns for better or worse after the 6 month notice was given, but before the date of withdrawal? Can the dissociating member file a petition for judicial dissolution instead of giving not less than 6 months’ prior written notice of his or her intent to withdraw? Does judicial dissolution affect the fair value of the member’s economic interest? As of what date is the fair value valued? Can the remaining members (individually or collectively) avoid dissolution? If not, how does dissolution of the limited liability company change the relationship between the members? Does judicial dissolution terminate the existence of the limited liability company?

In the same vein, the stockholder of a corporation that elected to be a statutory close corporation may, in certain circumstances, demand fair value for his shares. Md. Code Ann., Corps. & Ass’ns, § 3-302. If the stockholders are unable to reach agreement on said value, the stockholder desiring to dissociate may petition a Court for judicial dissolution of the corporation and the appointment of a receiver. Any one or more stockholders who desire to continue the business of a close corporation may avoid the dissolution of the corporation or the appointment of a receiver by electing the purchase the stock owned by the petitioner at a price equal to its fair value. Md. Code Ann., Corps. & Ass’ns, § 4-406.Of course, the same questions which emerge in the context of limited liability companies are also present: as of what date is fair value determined? What happens if business improves or declines after the petition for judicial dissolution is filed? How are other claims between the stockholders affected by judicial dissolution? Does the close corporation cease to exist? How does the corporation continue to meet its obligations and operate its business? Additional concerns arise regarding a stockholder’s ability to transfer or alienate his shares. A stockholder of a statutory close corporation cannot transfer his shares in the corporation unless all stockholders consent or the transfer is expressly permitted in a unanimous stockholders’ agreement.

You may like your business partner, but when the time comes to sever your business relationship, or if you want to ensure your organic documents aptly deal with the end of your business relationship, it is important to choose the right attorney and law firm. As proven litigators and trusted advisors to many, Kelly|Dorsey, P.C. is your firm of choice. Whether faced with an amicable dissociation or a dissociation that requires not only an intimate knowledge of the applicable law, but also the keen ability to zealously resolve disputes in the courts or through arbitration, the attorneys at Kelly|Dorsey, P.C., draw on a wealth of specialized experience in handling the dissociation of ownership interests in various types of operating business entities.

If you would like to learn more about Kelly|Dorsey’s business, litigation, and alternative dispute resolution practice groups, please fill out and send the Contact Form on our Contact Us page. You can also connect with Kelly|Dorsey through Facebook, Twitter, and Linkedin. Attorney Gregory A. Dorsey can be reached via email at gdorsey@kellydorseylaw.com or telephone at (410) 740-8750.