In my previous guest post I talked about some of the important considerations when starting your own business. The primary person of choosing a business entity such as a limited liability company or a corporation is to limit your personal liability.
However, there are a number of additional issues that must be considered when considering going into business with other people.
As a general point, most new businesses formed in Michigan in the last few years are smaller closely held companies – typically either owned and operated by family members or by a small group of individuals. These types of business relationships are valuable – since they are often formed between people who know each others’ strengths and weaknesses and based on the assumption they would work well together, decided to go into business together. If you are headed down this path, I offer a few points to consider.
I. A Clear Way Out: Spelled Out in Your Partnership Agreement
These closely held businesses also pose unique challenges. The fundamental question you need to ask yourself when going into business with partners:
In the event of a dispute, does your partnership agreement (a/ka/ operating agreement, bylaws) provide a clear way out?
The Partnership Agreement should address questions like:
- Under what circumstances can a partner leave the business voluntarily?
- What happens when a buy-out is triggered, in the event of death or disability?
- How do you value the owner’s interest in the Company?
- What is the process for accepting new owners in the company?
- What is the mechanism for parting ways if there is business dispute between the partners?
These questions must be discussed and worked out between the partners and clearly spelled out in the partnership agreement.
What if the issues are not clearly spelled out in the Agreement?
As a Lawyer, I generally see the “worst case scenarios.” It is usually when a business dispute has reached its breaking point where a client comes to me to discuss their problem and seek advice on how to solve the problem.
Much of the business disputes that I see is rooted in this truth:
In a closely held company it is very easy for one group of owner[s] to freeze out another owner.
II. Freezing Out: A Unique Problem in Closely Held Businesses
I guess the first question is, “freeze out from what*?”
- Control – Decision-making
- Disclosures of Company Business
- Profits in the Company
- Employment in the Company.
Under Michigan Minority Shareholder Oppression, MCL 450.1489 “A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
- or willfully unfair and oppressive to the corporation or to the shareholder.” (*this is most often the scenario where these cases arise – from the “freezing out” the minority owners from the business)
Filing a lawsuit should usually b e a last resort to settle a dispute. However, as indicated, Michigan law recognizes the unique relationship of closely held businesses and some of the unique problems that can be associated with them. The law provides a court with a broad equitable power to “make things right” in the event that it finds there is oppression going on in the business.
Although sometimes filing a law suit for Minority Oppression is warranted due to the egregious misconduct of those in control of the company- it is always best to avoid litigation when possible. The obvious take away points are two-fold:
- Get an attorney involved before the business relationship begins and clearly document the business relationship, especially an exit strategy.
- If you are being frozen out of control in a business – Michigan law gives you broad remedies, including the minority shareholder oppression statute.