Disputes are part of doing business. The potential for disputes with customers, employees, or vendors is often acknowledged in purchase orders, contracts, or other written agreements. Unfortunately, disputes among business owners and partners can also arise (in successful and unsuccessful businesses) and the potential for these disputes is too often ignored.
The North Carolina Business Court routinely handles litigation between owners of a single business and other internal business disputes. Some recent decisions highlight issues that frequently arise and illustrate that advance planning could have possibly mitigated the disputes.
When a Business Partner Wants a Buyout
In Brady v. Van Vlaanderen, three siblings (with some spouses) owned a manufacturing business together and later formed a limited liability company, called United Realty, to own and rent real estate that they owned together. Both businesses appeared to be successful. Some years down the road, one of the siblings claimed that her reasonable expectations of ownership had been frustrated because she was no longer being paid the amount she claimed was owed to her through an oral agreement. Around that same time, the same sibling proposed ideas for how to manage the real estate to generate additional income, and her ideas were rejected. As a result, that sibling felt like “she [was] stuck in an ownership role . . . without any of the benefits of ownership,” and filed a lawsuit to dissolve the companies or have her interests bought out.
The complaining business owner in Brady did not get what she wanted. The North Carolina Business Court first explained that “the Court cannot mandate a buyout” and further explained that “[a] claim for judicial dissolution is not intended to police disagreements among members that are not accompanied by proof of substantial mismanagement or financial loss. While Brady and the individual defendants apparently disagree about business decisions concerning the use of United Realty’s land, those disagreements are not sufficient evidence to warrant judicial dissolution.”
The complaining business owner in Brady (and probably the defendants as well) could have benefited from a pre-arranged buyout plan. For example, a plan that would be agreeable to all parties could have been reached in advance that would have allowed an owner’s interests to be purchased by applying a set formula/criteria to calculate the value of the interests and establishing the timing of payments to the selling owner. This could have been pre-arranged among the owners at a time when everyone was getting along. If such an agreement had been in place, the complaining business owner would have had an option to get “unstuck” from her ownership interests and likely would have avoided the costly litigation that all of the owners had to bear.
When Minority Shareholders Demand their Money Back
In Bucci v. Burns, minority shareholders of a failed business brought suit against the majority owners after the business filed for bankruptcy. The minority shareholders complained that they were defrauded into making their investments in the business and wanted their investments back. Unfortunately for the minority shareholders, no written representations or agreements regarding their minority ownership interests existed, but instead their claims relied on alleged oral statements about the business plan. All of the claims were dismissed.
The complaining minority shareholders in Bucci could have benefited from a written agreement with the majority owners. For example, their investments could have been personally guaranteed by the majority owners, or they could have had a written agreement governing how the business would be operated and how the money invested by the minority shareholders was to be used. Pre-investment written agreements would not have guaranteed that the minority shareholders in Bucci would have been protected, but at least it would have given them a claim that the Court would have considered.
Why Ownership Interests Need to be Documented
In Brown v. Secor, the plaintiff funded a real estate business LLC and years later filed a lawsuit to establish his membership interest in the LLC, among other things. A written agreement regarding the investments was not made. After the initial investments were made, the plaintiff refused to participate in the venture any longer without written documentation of the relationship between the parties, which resulted in the signing of some documents.
After a dispute arose and the lawsuit was filed, the lack of a written agreement regarding the investments proved fatal to many of the claims and, with respect to the membership interest in the venture, the North Carolina Business Court rejected the plaintiff’s arguments and held that he did not own a membership interest as a matter of law. However, many claims arising out the funding of the venture remain pending.
It probably goes without saying that the plaintiff in Brown could have benefited from some advance planning. A written agreement clearly defining whether he was becoming an owner of the company in exchange for his investment, or any other written agreement documenting the investment would have gone a long way in preventing or resolving the dispute. Now the parties are stuck in court to have their relationship and any remedial measures to be taken established by our judicial system.
The North Carolina Business Court has already issued more than 80 opinions this year. The Brady, Bucci, and Brown cases are representative of the many opinions highlighting the need for business owners to anticipate and plan for the potential that disputes will arise among the owners. Disputes among business owners are not limited to unsuccessful business, but as illustrated by the Brady case, also arise when businesses succeed.
Acknowledging the potential for disputes among business owners does not mean that a business is destined to fail or that business partners do not trust one another. Instead, taking steps to cut off or mitigate potential disputes in advance will often operate to the advantage of everyone, as pre-approved conflict resolution or exit plans can be negotiated with level heads and an eye toward what is fair to everyone.
When a dispute arises, it is often more difficult to take a non-emotional approach to resolution. Pre-approved plans of this type may also help prevent internal disputes from arising, as owners know that certain events could trigger the potential for their shares to be bought out or for them to have to buy out the shares of another owner.
Most businesses plan ahead for disputes with customers, employees, or vendors by adding language in their contracts. It is worth thinking about internal disputes the same way. Internal disputes are always unpleasant, but preparation in advance can prevent or lessen the sting.
About the Author — Andrew Freeman
Andrew Freeman is an attorney at the law firm Bell, Davis, & Pitt and focuses his practice in litigation. He has experience in all levels of trial and appellate courts, involving business, banking, insurance, employment, environmental, intellectual property and estate matters. Andrew is active in the Winston-Salem community and involved with the NC Bar Association, serving on committees engaged in pro bono cases, poverty law issues, leadership issues and mentoring teenagers.