Can My Business Partner Push Me Out?

From violations of pre-established agreements to fundamental differences over the vision for a company’s future, partnership disputes can arise for many different reasons. Even partners who begin their ventures on the best of terms can encounter problems that threaten their business and the tenability of their partnerships.

When they do, whether one party can push another out will depend on the circumstances, including the structure of the business, the prevailing agreements in place, and whether the dispute stems from a violation of the law.

Does your business partner want you out? Call (713) 783-3110 or contact us online to discuss your rights as a partner in the business.

How Can I Prevent my Partner From Forcing Me Out?

The best way to prevent a business partner from forcing you out is before a dispute arises. A clear and enforceable partnership agreement that outline procedures to resolve disputes will help ensure the continuity of the business and that the rights and interests of all partners are protected.

When properly drafted, partnership or operating agreements establish clear guidance on operational issues, such as:

• The duties and powers of partners
• Distribution of profits and losses
• Ownership of trade secrets and intellectual property
• The procedures for resolving partner disputes
• The terms for the transfer of ownership, member replacement, and asset distribution in the event of dissolution
• The method of business valuation

If a dispute has already put you on alert for a potential pushout, your options and plan of action depend on the prevailing facts and circumstances.

First, Look at Company Documents

Whether your business is a limited partnership, limited liability corporation (LLC), or another entity, you may have a partnership agreement or other operating agreement in place (often drafted when the business entity was created). Written company agreements often contain provisions that specifically outline the processes for resolving disputes among partners.

This may include a buyout agreement for situations in which one partner sells their ownership interest in the business. Some common events that trigger a buyout agreement include:

• Death or incapacity of a partner
• Loss of a professional license
• Termination or retirement of a partner
• Management deadlock
• Divorce or personal bankruptcy

Some buyout agreements may also have a push-pull mechanism that can be voluntarily triggered by either partner.

Is There a Buyout Agreement in Place?

If your partnership or operating agreement includes a buyout agreement, also known as a buy-sell agreement, your business partner’s ability to force you out will be tempered by the provisions of that agreement.

Review which events trigger a buyout. If you haven’t triggered the buyout provision (or otherwise violated the agreement or any laws), it will be difficult for your partner to force you out.

If a trigger event (as defined by the buy-sell provision) has occurred, you are required to abide by the terms of the provision. If you refuse to comply, your partner can petition the courts to impose an order to comply with the terms of the agreement.

Some buyout provisions are structured as a push-pull agreement (also called a shotgun clause). These are triggered voluntarily by one partner or the other.

How Push-Pull Agreements Work

A push-pull agreement is triggered when one partner offers terms and conditions for a buyout to partner B. Once Partner A makes an offer, Partner B can either:

• Push: Accept the “push” offer and sell their ownership interest at the price and conditions set by Partner A; or
• Pull: Force the other partner to sell their interest to them on the same terms and conditions.

Consider this example: Partner A offers to buy Partner B's 50% interest for $500,000. Partner B has two options:

1. Accept the offer and sell their interest for $500,000; or
2. Counter by purchasing Partner A's interest for $500,000.

This mechanism ensures fair valuation since the offering partner must be willing to either buy or sell at the proposed price. It also prevents deadlock in 50/50 partnerships and can help avoid lengthy disputes that cause business disruptions.

As with any buyout provision included in a signed agreement between partners, if the push-pull mechanism is triggered, the other partner can be compelled by the courts to comply.

Read our Buy-Sell Agreement Case Study about a partnership dispute ending in a buyout triggered by a push-pull provision.

Forcing Out a Partner When No Partnership Agreement Exists

In the absence of a written partnership agreement or other contractual provision, state law will govern the available rules and remedies for the winding up of a partnership. Per the Texas Business Organizations Code Title 4 Sec. 152, this can include:

• A voluntary decision by both partners
• A violation of state or federal laws
• A breach of the partnership agreement
• A violation of a duty to the partnership causing harm
• A partner becomes a debtor in personal bankruptcy
• Court-ordered dissolution or forced buyout

Because pushouts or the end of a partnership can risk business continuity, work with legal counsel to evaluate your options.

At Hendershot Cowart, we can help you negotiate with your partner to try and retain your position in the business. Or, if the partnership is no longer viable, work toward favorable separation terms to avoid costly litigation.

If negotiations fail, we can pursue litigation to defend your partnership rights by asking the courts to force a fair and reasonable buyout.

When Can a Texas Court Force a Partner Buyout or Business Dissolution?

Under Texas Business Organizations Code Section 11.314, a district court has jurisdiction to order the winding up and termination of a business partnership or LLC – when petitioned by an owner in the business – if the court determines that:

1. Economic Purpose Likely to be Unreasonably Frustrated: Courts may find this standard met when the partnership's core business model is no longer viable, market conditions have permanently changed, or key assets or business relationships have been lost, undermining profitability.
2. Owner Conduct Making Business Impracticable: This ground addresses situations where one partner's behavior makes it impossible to continue operations, such as fundamental disagreements that prevent decision-making or open hostility between partners.
3. Not Reasonably Practicable to Operate in Conformity with Governing Documents: This is the most common reason for court-ordered dissolutions and means that partners are "unable to pursue the purposes for which the company was formed in a reasonable, sensible, and feasible manner" most often due to partner conflict.

Texas law empowers courts to "make any other order, direction, or inquiry that the circumstances may require," giving judges broad discretion to craft remedies that protect the rights of the parties – from winding down the business to a forced buyout.

Texas’ Definition of Business Partnership

Is there a question over whether the business arrangement is a partnership? Per Texas Business Organizations Code, factors indicating that two or more people are in a partnership happen when the persons:

• Receive or have a right to receive a share of the profits of the business;
• Have expressed an intent to be partners in the business;
• Participate in or have a right to participate in the control of the business;
• Have an agreement to share losses and liabilities, and agree to contribute money or property to the business.

Receiving a share of profits as payment for a debt, rent, or wages does not constitute a partnership; nor does co-owning property.

Key Takeaways

• If your business has a partnership or shareholder agreement or operating agreement in place, it will likely contain specific rules as to how the business can remove and replace members.
• If you have not violated the law or the conditions of an agreement, it is difficult for a partner to push you out.
• If no partnership or operating agreement exists, state law will govern available rules and remedies.
• Courts can order a forced buyout or dissolution only under certain circumstances. If you and your partner equally own the business, your partner can petition the court for dissolution but must prove that a fundamental disagreement prevents the business from operating.
• Following a push-out, pushed-out partners may have the right to receive profits and inspect records of the business.

Ready to Defend Your Partnership Interests?

Hendershot Cowart P.C. has extensive experience counseling business partners, shareholders, and executives in a range of business law matters. From drafting essential contracts and agreements to helping resolve partnership disputes through negotiation or litigation, our attorneys have the tools to help clients explore their available options and pursue the most prudent course of action.

Call (713) 783-3110 or contact us online to speak with an attorney.