There are few things more disheartening and frustrating to a business owner than feeling stuck with a partner who is bringing the business down. Beyond the disappointment of dashed hopes and disappointment in somebody in whom you’d placed your faith and trust, there are also the financial repercussions, and the need to put the business onto a firm footing. Many partners who are in this situation find themselves at a loss, unsure where to turn or what steps are available to them. Fortunately, the law does offer a few options.
The first option is to review your partnership agreement to see what terms have been included in your contract. Your business attorney may have already included criteria describing maintaining the business while forcing a partner out. If not, state law may provide you with an answer in the form of a “freeze-out” merger.
A freeze-out merger describes the action that one partner can take against another when a partnership dispute can’t be resolved. If you are experiencing irreconcilable differences or the partner’s actions are proving detrimental to the interests of the business, you can create a new entity and plan of merger that merges your existing partnership entity into a new business. By exercising that option, you can then force the member that you want to push out to accept cash for their interest in the original company. Without equity in the new entity, they are left with no other option.
Though this is an effective method of solving the problem, it must be done in a way that conforms with state laws. While the new entity will have all of the assets and liabilities of the original company that was formed within the merger, it is essential that the minority partner who has been forced out is provided with a reasonable and fair value for their share of the business that has been replaced. Failure to ensure that they have been treated fairly can result in a dissent, which will bring the merger under the scrutiny of the courts and require an appraisal by an unbiased third party.
Staying calm and reasonable and acting in accordance with the laws is the best way to ensure that an aggressive action like a partnership freeze-out is conducted legally and in a way that cannot be contested. For assistance, contact our firm today.