PARTNERSHIP DISPUTES FAQ

California Shareholder/Partner Disputes

In companies, disputes between shareholders or business partners can lead to serious legal problems. Unless dealt with quickly, these disputes can cause the demise of a corporation or partnership. Business disputes usually involve a company's finances, the future direction of the company, or personal conflicts between the shareholders or partners.

Typically, when a business is first formed, its shareholders or partners are more concerned with getting the business up and running so it will hopefully make a profit, then they are with making sure the business is set up properly to avoid conflicts between the shareholders or partners. Often the corporate bylaws or the partnership agreement are silent about important issues such as what happens if there is a tie vote among the shareholders or partners; a shareholder dies or becomes disabled; a shareholder or partner becomes divorced, or simply wants to leave the company.

Internal disputes in a corporation or partnership can lead to a deadlock among the shareholders or partners leading to time consuming and expensive litigation. The day-to-day operations of the company are often ignored or placed a distant second to the ongoing dispute. The company's profits decline, morale among the employees sinks, and the shareholders or partners become fixated on the internal dispute and lose sight of the company's business objectives.

Avoiding Shareholder and Partnership Disputes

Properly drafted shareholder/partnership agreements can frequently prevent shareholder and partnership disputes. For corporations, buy/sell agreements can address many important issues, including what happens if a shareholder dies, becomes disabled, gets divorced, files for bankruptcy, or simply wants to leave the corporation. A buy/sell agreement can contain a formula for determining the value of the corporation, the manner in which shareholders who leave the corporation will be paid for their shares, and prevent shareholders from selling their shares to individuals the other shareholders do not want to own the shares. A partnership agreement can address the same basic issues.

Unfortunately, no matter what precautions are taken, disputes among shareholders and partners can and will occur. When they do, swift and decisive action must be taken. When possible the dispute should be mediated before an experienced mediator. If mediation fails, and if litigation is necessary, the litigation should be handled by experienced business attorneys who will look out for the best interests of the shareholders and partners, as well as the best interests of the company. The lawyers at Jacobs & Dodds have decades of experience handling shareholder/partnership disputes.

Shareholders can become deadlocked when making important decisions. If half of the shareholders vote one way, and the other half vote the exact opposite, who is going to break the tie? In these situations, we suggest the use of an independent mediator or business advisor to break the tie. This should be addressed in the bylaws of the corporation.