Expert: Timmy Chou - 3/2/2011

Question
QUESTION: hello i own 33 1/3% and am the sole operating partner.my 1 partner and i togather own 66 2/3% and are have many problems with the other partner also owning 33 1/3%. He is a liabity to the corp. 2 of our female staff have complained obout inapp. behavior. we confronted him and he and his wife went crazy. he said he wanted out... then return and said i was in breach of contract which iam not. the staff will state that. and so will the other partner. he asked for an offer and now said he is not out for ant amt. we can not work with him and either the staff. our contract calls for arbit. what are my chances?

ANSWER: Thank you for your question!

If you have looked at some of my previous answers you may know that I always advise questioners that 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 mediation, management and consulting experience.  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 business creation 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 as a good discussion foundation.  Here are my recommendations:

1.  Document a chronological timeline noting the creation of the business, the promises made and the individual contributed work product, asset contributions, the identification of accounts, or any other contribution.  Also document the rise of the conditions leading to the dispute and record how this plays out.  Note any written agreements or oral agreements and understandings.  These carry the force of law.

2.  Review your existing documents.  Review whatever written agreements, operating agreements or other governing documents you have for guidance about rules for disengagement, if any.  Again, oral agreements count.

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 litigation.  Remember that nearly 90% of lawsuits settle before trial so the question is usually not IF you will settle, but when and at what cost.  Disputing 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 may wish to understand the legal landscape.  In most states when a company does not have completed organization documents or operating bylaws, the state has standard bylaws of some type codified and these would be the documents you would rely on legally.  You can get a copy and see if they offer any guidance.  

Once you understand where you are and how you got there you are then in a position to work out a settlement.  

In the case of a one third partnership, two partners typically have the authority to do whatever they wish as they have the voting majority.  Note that Partners also 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.  

Your next step would be to have a directors meeting and make necessary management changes assuming your governing documents give the majority directors the final authority.

As to arbitration I would have to understand the conditions that would require an arbitration to comment on that.

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: when arbitrating, does arbitration do what is best for the LLC. I am the only operating part . i am the only one with the experience.

Answer
I would suggest you look closely at the contract for guidance.  It is uncommon for a contract (that typically specifies some performance in exchange for something else) would also encompass a 1/3 ownership in an LLC (which once it is given cannot easily be taken back).  The two different elements are at odds.  Typically 2/3 of the owners can vote to do whatever they wish.  Why don't you have a member managers meeting and vote to set aside the contract for non-performance.  Put the blame on the problem and force him to have to prove he is not the problem first.  

Arbitrations are often better than litigation but you are at the mercy of the arbiter, and once you have agreed to the process there is no guarantee you will like the outcome.  There is quite a range of outcomes possible and it is not easy to predict this from arbitor to arbiter.

Hope these ideas are helpful!