When colleagues start a business and become partners, they make promises about the work they intend to perform and the contributions they intend to make. Smart potential partners find competent lawyers to put together a partnership agreement that spells out each partner’s obligations. But written agreement or not, on some level, partners have to trust each other to work effectively as a team. Partners and shareholders in a close corporation have a fiduciary duty to each other and the enterprise. The fiduciary duty owed by one partner to another is one of “utmost good faith and loyalty.” That means no self-dealing, no theft and no interference with a corporate opportunity.
Unfortunately, business partners, like married couples, are not immune from disputes, or the need for a business divorce. Best practices should include, in the partnership agreement itself, some form of alternative dispute mechanism for resolving disputes privately and cost effectively. But when one side is unwilling to come to the bargaining table or where a partner has acted egregiously (such as misuse of funds or steering business to himself or another company in breach of his fiduciary duty), litigation or arbitration may be only the option, at least initially to prevent further misconduct.
Courts can issue preliminary injunctions to prevent further misconduct (including immediate removal of the offending party from the partnership) and maintain the status quo while the parties litigate their dispute either in court, or in an arbitration venue. Remedies can include a buyout, restitution, and dissolution of the partnership. Trigger warning: litigating these business divorces can get very expensive, especially in a case involving allegations of six- and seven-figure damages that must be substantiated by experts in the industry. Parties also should consider the reputational effects of a public feud.
It is best to seek counsel as soon as problems arise to evaluate options and protect the business you started.