AboutTimmy Chou Expertise I am a experienced Mediator and a partner in a management consulting firm. As a mediator I work as a third-party neutral and specialize in partnership/shareholder disputes, management/labor issues, company culture difficulties, and family-owned business problems. I can help describe why alternative dispute resolution may be a good choice for you. As an experienced management consultant I may be able to offer creative ideas to help resolve your organizational and business problems and disputes. "If you say conflict, I say opportunity".
Question QUESTION: I am 1 of 3 equal partners in a corporation that has 2 LLCs. One of our
partners has decided he no longer wants to partner w/us. He has requested
that we separate but needs a job. The corporation (2 remaining partners) has
given him the following options: 1. buy out remaining partners for our initial
investment; 2. remaining partners buy him out for his initial investment; or 3.
purchase one of the LLCs from the corporation. He keeps changing his mind
on what he wants to do even though he initiated the separation issue. He
finally agreed via email to purchase one of the LLCs at the price set by the
corporation minus his initial investment. He has now changed his mind again
and has decided that since we are "separating" he does not have to purchase
the LLC from the corporation, he just gets whichever one he wants.
ANSWER: Thank you for your question!
As I always advise questioners, mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.
I am not an attorney and cannot give you legal advice but can respond from my management and consulting experience. I am assuming that these various settlement scenarios are being crafted "on the fly", and I am also assuming you have not done anything to put you in breach of any written partnership obligation. Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.
It is best to have as much structure created at the outset of starting or building a business rather than in the middle because there are inevitable assumptions and expectations created by each party. FYI the area of least development in start-up businesses is in break-up or dissolution contingencies, where partners specify what the rules are in case of problems.
Consider doing the following preparatory and proactive steps right away to protect the remaining partners. Here are my recommendations:
1. Document a chronological timeline noting the creation of the business, the promises made and your individual contributed work products or other contribution. Also document the rise of this dispute and record how this plays out.
2. Review your documents. Review what ever written agreements, operating agreements or other governing documents you have for guidance about rules for disengagement.
3. Look at your legal options. You don't say how much money is involved here but any litigants will incur a large cost to file suit, and you have to count the possible cost to yourself to pay for or defend this. Remember that over 80% of lawsuits settle before trial so the question is usually not IF you will settle, but when and at what cost. Both parties would be better off to wisely choose a cheaper, faster mediated settlement.
4. Go see a lawyer. The local Bar Association usually has a referral service that will give you access to an attorney for free. You need to understand the legal landscape, including the mediation requirement of your documents.
Once you understand where you are legally you are in a position to begin to push back on your partner. Typically in an LLC a one third partner cannot override the wishes of the other two thirds, as the majority rules in a vote. Your partner may wish to do one thing or another, but cannot compel the partnership. The Partnership can hold a vote and determine what it wants to offer the departing partner. Partners have a duty to the partnership to not damage it. Hence, a partner cannot just demand his "piece" out of the middle if it will precariously damage the partnership interests for all. A prudent buyout plan over time usually makes the most sense.
Try to make it clear the partnership will not tolerate being stonewalled or bullied.
These are some ideas. Feel free to follow up with additional questions.
For your general information, the pros and cons of the types of dispute resolution methods follows.
GOOD LUCK!
Arbitration, Mediation, and Litigation
Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system
Benefits of Arbitration:
Confidential, no public record
Limited exchange of documentation, information
Quick, don't have to wait for a court date
Arbitrators have expertise in the subject matter and are trained in conflict resolution
Cheaper than litigation
Preserves business relationships
Negatives of Arbitration
It's often a compromise, no 100% winner
Complex arbitration can be costly
If not satisfied, may litigate the arbitration procedure
Poor results with an unskilled arbitrator
Both parties must agree to cooperate in the process
Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.
Benefits of Mediation:
Neutral mediator can objectively suggest alternatives not considered before
Parties are directly engaged in negotiating the settlement
Can be quicker than litigation
Less costly than litigation
Preserves business relationships
85% of American Arbitration Association cases mediated find successful solutions
Negatives of Mediation
may not reach a binding decision
unskilled mediator
Litigation: using the judicial system to resolve disputes
Benefits of litigation:
a clear winner and loser
uses a prescribed set of procedures
more predictable outcomes
is final
Negatives of Litigation:
waiting for court dates can do more harm
usually more expensive than mediation and arbitration
part of the public record
---------- FOLLOW-UP ----------
QUESTION: Since the word "separation" was used in conversation/emails, the partner has
jumped on this as an agreement to dissolve and he takes the most profitable
LLC w/half of the financial assets/liabilities. The partnership did give him
options of buying out the 2 remaining partners or purchasing one of the LLCs
from the corporation. Does the work "separation" hold legal weight?
Answer As I see it the term "separation" is a generic term to describe one party separating from another party. The manner of the separation is not implied from the term itself. Hence a spouse can "separate" from another spouse, without divorcing. An employee can be separated from employment without implying that the employee was fired or quit. The only separation I see is the partner from you guys. How this is done is not defined. The purchase of the LLC is not related to the separation as I see it, but only a method of settlement. Therefore, once the separation terms are agreed to, THEN the LLC purchase becomes a part of the PAYMENT of the settlement, but HARDLY a requirement of it.
