Expert: Timmy Chou - 1/6/2010

Question
I have been a 40% partner in a financial planning firm for 12 years. There are two other partners 40% & 20%. The other 40% partner is an alchoholic. She was on the wagon. However she has not been doing her share of the work for over a year and it is now obvious that the drinking has started again. It has also come to my attention that some of our clients are becoming aware of her drinking and are questioning the safety of their money. The 20% partner and I are contemplating dissolving the partnership. We have no buy sell agreement. The partnership acts as a shell that we put all our commissions into. Then we pay out our salaries. We have split our sales into the 40/40/20 and even without the partnership the commissions would still be paid to us. What are our options to remove the partner while keeping the business going? Most of the clients will stay with me if we dissolve since I have been doing the client reviews for the last year.  

Answer
Thank you for your question!

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.

The case you describe here does not sound like an active dispute but I suspect one may be brewing.  Your intentions about wanting to get out of a probable problem relationship is wise and I urge you to move forward expeditiously.  Note that this issue may have legal factors 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. Hence, in your case, some necessary tasks were passed by earlier in your relationship and now you have some work to do to see if you can extricate yourself.  

It is well to note that you and your ally together hold a majority stake in the enterprise.  Unless you have governing documents specifying how you are to vote and determine things you will rely on the statutory governing documents present in your state.  Consult these for specific rules about how you may be able to proceed.

For example:

If your state or governing documents allow you to vote according to percentage of ownership, you may be able to merely hold a vote to determine to dissolve.  If this is not precluded you can hold a formal meeting, decide to dissolve and then do so.  If the problem partner disagrees she will have to sue to compel you to do something different, and it will be uphill if you have complied with the rules.  She doesn't have to like the outcome or even consider it fair, as long as it was legally arrived at.

It is likely to be easier to dissolve and reconstitute a new entity than to try to maneuver her out IMO.

I would likely recommend you NOT make the mistake of bringing the drinking into the question of why you are dissolving.  Your reasons should be general and generic and written down.   Be careful not to slander or talk about the partner with clients as well.  You don't want to open up a basis for challenge later.  


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 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