How Do I Legally Force Out A Partner From My Company?
*This is a transcript of the Facebook Live video from 6-8-18 Click here to watch the video.
It’s very difficult to force out a partner. What you can do is if the partner does not have enough ownership interest to govern the company, then you can just relegate that person to a minority shareholder situation. One of the worst situations that you can have in business is to have a minority shareholder, whether that’s a member of an LLC or a minority partner or a minority shareholder in a corporation.
Because once someone is relegated to that status, most people are not happy to do that, particularly if they’ve been active, involved in the company, maybe helped to build the company, and to be relegated to a passive role, oftentimes doesn’t sit very well. It’s also important to understand the person’s ownership role versus any employment role that the person has. Let’s say the person we’re dealing with is the vice president of the company and has been in charge of operations. Well, you can severe that employment relationship and hire a new operations person and stop paying that person their salary if that’s how you were organized, but that doesn’t solve the ownership interest.
You want to be very careful about how you deal with that. Now, in that circumstance, you could fire the fire and say, “Okay, now you’re going to be a minority shareholder, and we’ll deal with you in that respect,” and that’s fine, but that also means you’re going to have to share profits with that person based on the bylaws and operating agreement and whatever shareholder agreements may be in place. That person’s still going to be owed a fiduciary duty. You can’t just act with impunity and say, “Well, it’s my company.” Well, it’s your company, but you also have another partner out there, another equity holder, and so that person has to be considered.
They have certain rights to review documents and review accounts. If they want to be active, there’s a certain amount of activity that they can be involved in, and that can be frustrating, particularly if they act as the opposition and object to every business move that you want to make. You can freeze them out to a certain extent, but there are ramifications for that both legal and practical, and you can’t just completely set them out without some sort of compensations to zero out the situation or having that ongoing relationship, again, going back to the divorce situation. It’s similar to two parents divorcing. They still have a child, and they still have to parent that child in some way.
Same thing with a business. You have to respect the other person’s role, whatever that might be. Now if the person is a minority shareholder and owns 2% of the company, then that’s a much different situation than if the minority shareholder owns 25% or maybe 45% of the equity, and so again, each situation is going to be different.