Can My Business Partner Force Me Out Of My Company?
*This is a transcript of the Facebook Live video from 6-8-18 Click here to watch the video.
One of the worst things in business is to have a minority shareholder, well, the only thing as bad as that is to be a minority shareholder, because again, if you don’t own a controlling interesting in the company, then your role can be marginalized, and that can be very frustrating. If the majority is careful about how they do it and consult an attorney and stay within their bounds and observe their duty of loyalty, then you may not have a whole lot of recourse.
Frequently, businesses have buy sell agreements that address these situations, and so one of the things you want to do is to look at your bylaws if you’re a corporation or operating agreement or shareholder agreement or partnership agreement. Those agreements typically outline certain responsibilities and certain obligations that each of the parties owe to each other, and if you’re lucky, it might even outline a method by which in that situation the company or the other shareholders can buy you out of your equity interest.
That can be a very, very valuable thing, an those agreements are called buy sell agreements. Sometimes they’re called shareholder agreements, and that leads to the question of: “What is a buy sell agreement? What is a shareholder agreement?” In this context, a buy sell agreement is an agreement that deals with certain triggering events, and it may be death or disability or it may be termination or it could be the desire of one or more of the partners to withdraw or a vote of the board of directors to expel a member. When the triggering event is triggered, then the buy sell agreement will tell you how the valuation of the person’s shares will be done and how the payouts will be made.
Now we can do and probably will do a whole chat on buy sell agreements because they’re very complex and detailed. Most of them are written at the very, very beginning of the company and are generally pretty vague and vanilla, and sometimes they’re very specific. I’ve had situations where I had a very specific … I had a client who had a very specific buy sell agreement, but their situation wasn’t a triggering event under the buy sell agreement. In which case, the buy sell agreement was a guideline, was a suggestion on how to proceed, but it wasn’t controlling on how to proceed.
You want to understand your rights and understand the procedures under all of those agreements, and that’ll tell you what kind of operation you have, what kind of recourse you have against the company or against your other shareholders. One of the things that should be covered in that agreement is how am I going to place a value on my shares that’s fair and then how is the company going to raise the money to pay me back? Are they going to pay me in installments? Are they going to pay me in a lump sum? Are they going to have to take out a loan? All of these things could be covered in the buy sell agreement.
Now the dirty little secret of buy sell agreements is that they’re kind of ticking time bombs. By that I mean that the buy sell agreement is sitting there, and nobody really knows who’s going to invoke it, and if it’s not carefully crafted, once you decide to invoke it, it could be extremely unfair to one part or the other, and so that’s one reason why I always suggest, even if you’re not having any problems, particularly if you’re not having any problems, it’s good to have those buy sell agreements reviewed on a regular basis to make sure they still keep up with how your business exit might be done if it was triggered.