Expert: Timmy Chou - 6/28/2011

Question
Hi thank you for help. I own 10% shares of a clothing company. I have resigned on March 25th, 2011 of this year due to differences in management view. The company was evaluated at 2.5 million minimum. The other shareholder agreed to buy my 10% back at 250,000 with a personal guarantee, and payment over 24 months. Now it is June 28th, nothing have happened. He basically have been dragging time, and denying what he verbally agreed. There are some fabric that belong to the company which is at my warehouse, and I am not letting him moving it until this settles. He is threatening, changing facts, denying what he agreed to, and dragging time. What are my rights, and what can I do?  Thank you very much for your help.

Answer
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.  There is some serious money involved here nevertheless 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.  You may have more leverage depending on the state.

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 minority partner, typically you have very little leverage unless your operating documents call for a settlement regime when a partner decides to exit the partnership.  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.  This also applies to holding assets of the company as hostage negotiating leverage.  Be careful about this.  

The other party verbally agreed to purchase your portion.  This is not in writing and you will have to consult with counsel to determine how strong your position is in your state.  If you have relied on this promise in some demonstrable way (sold equipment, surrendered leases) and if the other party can be shown to have acted affirmatively as well in documented ways, you will have a stronger position to show that a tacit agreement was forged and that you should be able to enforce it.  

As to the ability to force the partnership to buy you out, again you will have to refer to your operating agreement, but absent any specific language, normally you cannot force anyone to buy you out.  You will have to find ways to make it irresistible to the other partners to exit your position, either by offering a sweet deal or by making yourself such a pain they get rid of you.  These strategies certainly carry risks.  

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