Dispute with LLC Co-Owner or Business Partner: What Do I Do?

What Do I Do if I have a Dispute with a Business Partner or Co-owner of an LLC?

Disputes between co-owners are unfortunately common and can quickly get very complicated. In part, this is due to business owners’ numerous, and not necessarily intuitive, duties and powers.

What Duties Do I Owe a Co-owner? What Powers Do I and My Co-owner Have?

The powers, responsibilities, and duties of business owners are governed by a complex mix of state statutes, court decisions, and contractual duties arising from express or implied agreements between the owners. Here are some of the most important:

Contractual Duties

Business owners frequently (although not frequently enough!) have governing contracts in place that regulate various aspects of the business. Here are some common contracts that can be both highly complex, but critical to fully understand both before and during an ownership dispute:

  • Bylaws or Operating Agreements. These agreements will typically define various rules and regulations formalizing the operation of the company as to voting and meeting requirements for owners and board members, officers’ titles and responsibilities, and any number of other topics that might be critical to an ownership dispute. As with many corporate documents, the scope and content can vary widely, will frequently be individualized to the particular ownership situation, and may have a vast impact on power dynamics within a given company. Don’t have bylaws or an operating agreement? Then you are going to look to Minnesota Statutes on these issues, which have default provisions governing many aspects of company operations.
  • Member (or Shareholder) Control Agreements, Contribution Agreements, and Buy/Sell Agreements. These agreements or something similar should be executed by all business owners to govern owner expectations and provide ground rules and procedures for key issues such as transfers of ownership, brining in new investors and owners, expected owner contributions, and several other topics. Again, there is not necessarily a “typical” agreement here, which is part of the reason it can be very dangerous to sign one of these documents without assistance from an attorney. The provisions are often central to ownership disputes and must be well understood.
  • Confidentiality Agreements and Nondisclosure Agreements (NDAs). Companies often recognize the importance of protecting key information from nondisclosure, and business owners need to be concerned as well, both in terms of protecting their business’s information from misuse, but also making sure they aren’t on the wrong end of allegations of misappropriation. Because confidentiality provisions are typically drafted broadly to protect as much information as possible and because it is often difficult to prove to a suspicious rival the negative proposition that you haven’t misappropriated information (especially given the way information flows electronically today), these can be a frequent source of disputes.
  • Noncompete Agreements and Nonsolicitation Agreements. No one should sign a noncompete agreement without serious consideration of the consequences, preferably with the assistance of legal counsel. At the same time, business owners need to seriously consider the need for these documents with key employees, as the lack of important noncompete agreements can completely sink an otherwise successful enterprise.

Fiduciary Duties

There are a variety, notably:

  • Duty of Care. Company decision-makers owe a duty of care to the company, although courts loathe to over-scrutinize the wisdom of business decisions, and will typically look for gross negligence before finding liability for a violation of the duty of care.
  • Duty of Loyalty. A common allegation between business owners is that one owner’s activities benefit him- or herself at the expense of the company, and such actions may violate the duty of loyalty owed to the company.
  • Duty of Candor and Honesty. Although the law often is reluctant to create a duty to affirmatively look out for the interests of another, it can be a breach of fiduciary duty to not disclose key information from a business owner or to be overly sharp-elbowed in dealings with a co-owner. See, e.g., Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173, 185-86 (Minn. App. 2001). Minnesota Statutes state that co-owners have a duty to “act in an honest, fair, and reasonable manner” in the operation of the company. E.g., Minn. Stat. §. 322B.833, subd. 4 (for LLCs); Minn. Stat. §. 302A.751, subd. 3a (for business corporations). The law’s high expectations of good behavior between co-owners raise all sorts of issues with regard to potential liability and are consequently frequently at issue in ownership disputes.
  • Duty of Good Faith and Fair Dealing—Preserving the reasonable expectations of owners. Closely related to the duty of candor and honesty, Minnesota courts have held that where a business owner has had his reasonable expectations frustrated by co-owners, the law may intervene to preserve those expectations. Most notably, Minnesota courts have held that an expectation of company employment may come hand-in-glove with business ownership, depending on the circumstances. If expectations of employment—or other key owner expectations—are not spelled out one way or the other in one of the agreements discussed above, expect bitter disputes to result.
  • Duties to creditors. Individuals may also owe duties to the creditors of their company if the company is actually insolvent or on the verge of insolvency. This can be a complicating factor to consider in many ownership disputes involving a company having trouble staying in the black.

Minnesota Statutes

Minnesota has statutory provisions governing many facets of companies that can be central to ownerships disputes, some of which can be altered by the company agreements listed above, and some of which can’t. Some of the key remedies for aggrieved business owners are outlined here as well, including the statutes governing judicial intervention in ownership disputes—what might be called a “business divorce.” See Minn. Stat. §. 322B.833, subd. 4 (for LLCs); see Minn. Stat. §. 302A.751, subd. 3a (for business corporations).

Leave a Public Comment

  • Virginia
    April 30, 2014, 11:11 am