Upon entering into a business partnership, most people don't focus on what could go wrong between partners or shareholders. With the trust that is instilled in a business relationship, it is hard to imagine that problems may arise years from the establishment of a business. One roadblock that partners may run into down the road is the underperformance or the non-existent participation of a partner.
The Burdened Partner's Options
This kind of complication may arise late in the life of a business, when one partner is ready to retire in one sense or another. One colleague may decide to neglect their responsibilities and assume they will be financially stable because they are a partner, leaving the other associate to pick up the slack. If you are put in a position where you have to compensate for a partner ignoring their duties, you have various ways to handle the situation based on:
- How your business was established. Do you have written agreements in place? If so, how detailed are they? If you have a written partnership or shareholder agreement in place, does it include dispute or buyout resolutions?
- Controlling and minority shareholders - which is the partner in question? Options for how to handle a partner not doing their part will depend on whether they are a controlling shareholder or a minority shareholder.
Ritchie v. Rupe
The Texas Supreme Court 6-3 opinion in the Ritchie v. Rupe case in 2014 drastically changed the buyout rights of minority shareholders. In the majority of shareholder cases, minority shareholders may not sue majority shareholders for oppression based on Ritchie v. Rupe. Only very limited circumstances will allow minority shareholders to successfully do so. These include breach of fiduciary duty, breach of contract, fraud, fraudulent transfers and request for a receiver. While this new development hinders the actions minority shareholders can take, taking steps such as having a detailed written shareholder agreement in place is the best way to help protect their interests.
The Importance of Written Agreements
Regardless of your position as a majority or minority shareholder, one of the most important things to have is a written shareholder agreement that is as detailed as possible. Bracing for situations that seem unlikely by including them in an agreement will help all parties involved be better prepared for the future of not just the shareholders, but for the company as a whole. Although no one anticipates their business partner taking a back seat and burdening the others with all of the responsibilities, agreements that can outline what happens in these situations are crucial.
If you find yourself taking on a fellow shareholder's obligations, contact the business attorneys of Hendershot, Cannon, Martin & Hisey, P.C. today to explore your options as a shareholder.