Business partners no doubt enter a business relationship with the best of intentions; however, sometimes it just doesn’t work out. When one shareholder decides to separate from the others, it can be a messy and complicated process, particularly if no buy-sell agreement was executed.

Here’s a scenario: Two business partners create a company with the agreement that the monies brought in by each will be their own (this is put in a signed letter). One shareholder owns 55% of the stock, the other 45%. After several years in business, one of the partners lacks the desire to expand the company, while the other has brought in 80% of the company’s business. The aggressive partner desires to carry forth the business and separate from the passive partner, but wonders what that partner will be entitled to since he/she is a stock holder who holds 45% of the stock.

What happens if the partner fights the split, or has no desire to separate?

Ultimately, if a partner does not want to sell out his/her portion of the business and has no desire to end his/her involvement, a lawsuit would be necessary to dissolve the business. Otherwise, partners would need to come to an agreement on the value of any assets the business holds, and the good will of the company. A partner could then be bought out for an agreed price, although it may not necessarily be determined based on the partner’s 45% stock holdings.

In these types of situations a buy-sell agreement should be seriously considered. In businesses which are corporations, a buy-sell agreement may be in the form of an stock-redemption or entity repurchase, or a cross-purchase.

Consisting of numerous clauses which are legally binding, buy-sell agreements control specific business decisions including the amount that would be paid for a shareholder’s interest should the partnership dissolve, who may purchase a shareholder’s portion of the business should a partner depart, and specific events (such as retirement, death, or disability of an owner) which may necessitate a buyout.

Pursuant to the California Corporations Code, an involuntary dissolution of a small corporation could be forced by any partner or shareholder who owns a minimum of one-third of the stock of the company.

As skilled Los Angeles business attorneys, the team at Spotora & Associates understand the complex issues involved in both small and large corporations. Let us help ensure your business contracts and agreements are in order, preventing potential future issues or costly litigation.