What do you do when your business partners lock you out? You started the business together, but now they want nothing to do with you. You know you have rights, but what are they? Depending on what steps you took before entering the partnership, this process can be simple or complex.
1. What Does A "Lock Out" Look Like?
A "lock out" can occur in a variety of ways. Some examples include: o Your partners are taking away your duties o Your partners are excluding you from the management and control of the business o Your partners are voting without you o Your partners are refusing to show you the books o Your partners are keeping all the profits for themselves o Your partners have changed the locks to the business without telling you o Your partners have stopped communicating with you o Your partners have shut down your work e-mail and phone Whether you've been locked out of the business depends on the facts and circumstances of your case.
2. What Will A "Lock Out" Do To The Partnership?
Typically, a "lock out" operates as a dissociation of the excluded partner from the partnership. Depending on your case, the dissociation may be "wrongful" or permissible. Dissociation does not automatically lead to the winding up and dissolution of the partnership (except for in two-person partnerships), but it does mean that the other partners intend to carry on the business without you. Rappaport v. Gelfand (2011) 197 Cal.App.4th 1213. Even if you cannot prevent your dissociation from the partnership, you may be entitled to certain remedies.
A. Partnership Agreement
If you and the other partners entered into a Partnership Agreement before starting the business, you may save yourself some time and expense by revisiting the Agreement. A Partnership Agreement typically lays out the rights and obligations of the parties. Many Partnership Agreements will address, among other things, the following: 1. Your interest 2. Your voting rights 3. You authority to manage and control the business 4. Dissociation options 5. A dissolution strategy 6. How decisions will be made 7. How responsibilities will be divided 8. How disagreements will be resolved 9. What will happen to the business in the event of death, divorce, or illness If you have a valid Partnership Agreement, then your remedies upon a lock out may be limited to those provided for in the Agreement.
B. Default Partnership Obligations
If you do not have a valid Partnership Agreement, the law prescribes certain default provisions for operating a partnership. In applying these provisions, the general rule is that everything is divided equally amongst the partners. Corp. Code ? 16401. This means that the partners share in the management, control, voting, losses, profits, liabilities, assets, and debts. Therefore, if you do not have a Partnership Agreement and the other partners choose to lock you out, their conduct may be in violation of these default provisions. As such, you may be entitled to a remedy.
C. Default Provisions re Dissociation
As previously mentioned, a "lock out" typically leads to dissociation, even if it is done in violation of the law. Dissociation means that you have been excluded from the partnership and can no longer conduct business in its name. The extent of your remedies will depend on whether the dissociation was wrongful or permissible. Corporations Code, section 16601 lists events causing dissociation. Absent a Partnership Agreement, a partner may be lawfully expelled from the partnership by a unanimous vote of the other partners if: 1. It is unlawful to carry out business with that partner; 2. There has been a transfer of all/substantially all of that partner's interest; 3. That partner is a corporation that has filed for dissolution, has had its charter revoked, or has been suspended; or 4. That partner is a partnership, limited partnership, or limited liability company that has been dissolved and is winding up A partner may also be lawfully expelled by judicial determination, bankruptcy, death, and more. Corp. Code ?16601.
D. Dissociation Remedies
If you have been lawfully dissociated in accordance with the above-referenced default provisions, your remedies may be limited to the buyout price of your interest in the partnership. However, if you have been dissociated under circumstances outside the scope of these provisions, you may be entitled to damages for wrongful dissociation. These damages include offsets, accrued interest, attorney's fees, costs, and expert fees, in addition to the buyout price of your interest. Corp. Code ? 16701(i).
E. Fiduciary Duties
Whether or not you have a Partnership Agreement, fiduciary duties are applied in the same way. The courts have held that if the Partnership Agreement alters you or your partners' fiduciary duties to each other or the partnership, that provision of the Agreement is invalid. Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411. So what are fiduciary duties? Simply put, they're rights you and your partners owe each other and the partnership. Corp. Code ?? 16401, 16403, and 16404. Your fiduciary duties include: 1. The duty of care; 2. The duty of loyalty; 3. The duty of obedience; and, 4. The duty of good faith and fair dealing. Essentially, you are required to act in the best interest of the partnership at all times. Breaching your fiduciary duties has serious consequences under the law. Corp. Code ? 16405.
herefore, if your partners' decision to lock you out of the business was a breach of their fiduciary duties to you or the partnership, they could be subject to liability, regardless of whether the dissociation was wrongful.