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 partner has the ability to 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.
How Can I Prevent my Partner From Forcing Me Out?
Protecting your rights and interests in a company you own with a business partner requires both proactive and reactionary measures.
This includes the need to establish clear and enforceable agreements and governing documents that outline procedures to resolve disputes when they arise – before they arise. Attorneys experienced in counseling business partners, guiding startups in business formation, and drafting contracts can be immensely helpful in structuring proactive protections most appropriate to your situation and goals.
When properly drafted, these 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 transfer of ownership, member replacement, and asset distribution in the event of dissolution
- The method of business valuation
In the event that a dispute has already put you on alert for a potential push out, your options and plan of action depend on the prevailing facts.
First, Look to 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 documents 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 of a partner
- Termination or retirement of a partner
- Divorce or personal bankruptcy
Some buyout agreements have a push-pull mechanism that can be voluntarily triggered by either partner.
Is There a Buyout Agreement in Place?
If you 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 known as push-pull agreements are triggered voluntarily by one partner or the other. Push-pull agreements create a process by which partner A may force partner B to buy him or her out or, conversely, force Partner B to sell their ownership interests to Partner A. This mechanism is triggered merely by Partner A offering terms and conditions for a buyout to partner B. 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
Because pushouts or the end of a partnership create risk, working with legal counsel is the most effective way to evaluate options to resolve conflict and engage in negotiations for a favorable separation. When no out-of-court agreement can be reached, knowledgeable counsel will be critical to exploring any potential for litigation and seeking dissolution or a buyout from the court.
Texas’ Definition of Business Partnership
Is there a question over whether the business arrangement is actually 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 profits of the business;
- Have expressed an intent to be partners in the business;
- Participate or have a right to participate in control of the business;
- Have an agreement to share losses, 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.
- If your business has a partnership / 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.
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) 909-7323 or contact us online to speak with an attorney.