While unfortunate, disputes between two business partners are not as uncommon as you would like to believe. This is why so many companies set contracts in place that clearly set boundaries between what aspects of the business two co-founders are in charge of. This not only protects the interests of both parties, but it protects the business. However, while things are still good, business partners often focus on more important things, like growing your business instead of setting down the fine print. Unfortunately, when a dispute strikes, it can make laying down the ground rules a real problem. So how should you protect yourself from a partner dispute and avoid messy business litigation?
Setting Contractual Duties in the Partnership Agreement
One of the best ways to protect your interests in your business in the case of a dispute is to lay down governing contracts. These contractual duties should include:
- Operating Agreements – These agreements define various rules and regulations on how the company will operate. This includes rules on voting and meeting requirements and the solidification of officer titles and responsibilities. By having these agreements in place, each partner will know their legally binding responsibilities, so a company can still function in the event of a dispute.
- Confidentiality Agreements – Every single business has information that they don’t want getting out to their rivals or the general public, and there can be nothing more devastating that having it get out due to a spurned business partner. Confidentiality agreements assure that if either party leaks detrimental information, you can wield the law against them.
- Control, Contribution, Buy/Sell, or Shareholder Agreements – These agreements are typically central to business partner disputes because they handle everything that most business partners will argue about. These contracts lay down rules about owner responsibility, the transfer of ownership, bringing in new investors, expected contributions, and several other issues. There is no typical contract among these, but they are essential for protecting your future interests.
Making Fiduciary Duties Clear
Fiduciary duties are less set in stone than contractual duties, but no less important. Essentially, fiduciary duties are put in place to keep both parties honest and assure their business is cared for. If a set duty is breached, you can hold the person who breached it responsible for any problems that arise. Fiduciary duties that disputing business partners should examine include:
- Duty of Care – This can be a difficult duty to prove a breach in, but courts will typically acknowledge gross negligence as liability.
- Duty of Good Faith and Fair Dealing – Minnesota courts hold that if one co-owner does not have their reasonable expectations upheld by another, that the law can intervene to preserve those expectations. This can be one of the more frustrating duties to prove and disprove which is why contractual duties are so important.
- Duty of Loyalty – This is a common fiduciary duty that business partners breach. Typically, this covers any activities that one partner engages in that benefit them at the expense of the business.
- Duty of Candor and Honesty – This duty states that owners have a duty to act in an honest, fair, and reasonable manner in the operation of the company rather than engage in a number of sharp-elbowed dealings with other owners that only serve as a detriment to the company.
In the best circumstances, contractual and fiduciary duties serve to help two business partners reconcile, but they also help protect your interests and those of the business in the worst cases when your relationship is beyond repair. Unfortunately, what is referred to as a “business divorce” can be a maze of messy legal dealings. If you and your business in the Burnsville, Minnesota area need representation, contact us today.