Agreeing to a 50/50 partnership begins with the best of intentions – everyone is excited, looking forward to a long, prosperous future together. But with each partner having equal control and decision-making power lie the seeds of a future war of attrition. Relationships that begin harmoniously can and frequently do deteriorate over time when each partner has their own ideas about how the business should be run.
There are, of course, many co-equal relationships that work well and never devolve into chaos. And there are some that simply cannot be made to work. Trouble or bumps in the road do not necessarily have to lead to litigation or mean the end of the partnership. The best way to avoid a situation in which the entire partnership is threatened is to both have a robust disputes clause in the partnership agreement and continuously communicate with the other partner.
Disagreements between 50/50 partners could arise based on personality differences between the partners or different viewpoints about a certain specific decision. For example, one partner may want to invest in expanding the business, while the other does not want to take that risk or would prefer to pay themselves more. What makes disputes among 50/50 partners even more challenging is that these arrangements are often family businesses that have long-standing rivalries between siblings or other family members.
The Partnership Agreement’s Disputes Clause Will Control the Disagreement
The first place to go when there is a dispute between partners is the language of the partnership agreement. There would usually be some mechanism in it to settle disputes in a 50/50 partnership. That mechanism often comes in the form of a disputes clause that governs situations in which the two partners cannot agree. This clause may lay out specific steps that must be taken to resolve a deadlock. There may be tie-breaking procedures when the two partners simply cannot agree on the business’s path or a specific decision.
Hopefully, the partners got help from an experienced business transactions attorney when they started the company and drafted the partnership agreement. It is always better to address potential situations in advance when both partners are getting along, such as future instances when they may not get along. If there is no applicable language in the disputes clause, or no disputes clause at all, it may be too late to add it when the partners are actively disagreeing with each other.
Disputes Cannot Go on Forever but they Can Certainly Feel That Way
Two partners cannot be locked in an indefinite dispute. Partners each can bind the partnership, and one partner could be personally liable in some circumstances for actions the other partner has taken. Thus, there are definite risks to a prolonged disagreement, and partners need a resolution relatively quickly. Discord among the partners is bad for business, and it threatens the long-term viability of the partnership.
In the case of a specific business decision, a third party could decide what the partners should do after listening to them both make their case for why their view is the right one. Faced with this possibility, each partner may not want to give up control of the situation and could be motivated to reach a resolution because they do not want the future of their partnership resting in the hands of a third party.
A Dispute Could Lead to the End of the Partnership
There are times when individual disputes or personality differences can add up over the long term. In those cases, the partners may question whether they want to continue working together. However, there may be significant equity and value in the business, and each partner may not want to give up their share. The challenge is how to keep the business going when the actual partnership is no longer feasible.
When the two partners are equal, you cannot employ some of the common legal methods to push out other partners, such as a freeze-out merger or expulsion. You are dealing with someone who is an equal, and it may not be as simple as each of you just going your own way. There is significant value built into the partnership, and neither partner will want to lose it. Thus, you may need to reach a resolution with the other partner that respects both of your rights.
Communication Between the Partners Can Help
Sometimes, disputes are the result of a breakdown in communication, and reestablishing communication could restore better relations. Speaking to each other constructively in an attempt to get on the same page is always the cheapest option for resolving a dispute.
If partners cannot—or do not want to—talk directly with each other, they should try to communicate with each other through their attorneys. Sometimes, it takes the help of third parties like attorneys when two partners are locked into a dispute that has high stakes and emotions. An objective viewpoint about the legal realities of the situation and how the partnership agreement would handle it could help each partner think more clearly about their current and next steps. In addition, a business attorney can communicate without the emotion that can keep partners from engaging with each other and ultimately agreeing on a path forward.
Mediation Could Help Resolve the Disagreement
One specific type of third-party-assisted communication is mediation. A trained professional can help both parties speak to each other. The mediator can highlight common points of agreement in the hopes of building a consensus. They can listen to each party and make suggestions that can help move the two parties closer together. The partnership agreement may even mandate mediation before either of the two parties takes any further steps toward filing a lawsuit.
Buy-Sell Provisions in Partnership Agreements
The partnership agreement may lay out other steps to take in the event of a deadlock. Some common methods for resolving partnership disputes may result in the removal of one of the partners or the dissolution of the entire partnership. These resolutions are not usually feasible in a 50/50 partnership. But a common and practical way to solve intractable 50/50 partnership disputes is to include a buy-sell provision in the partnership agreement.
There are numerous creative ways to execute a buy-sell provision. In its simplest form, one partner will inform the other that they are buying their interest in the partnership at fair market value. Then, an appraiser would assign a value to the business on which the purchase price would be based. The problem is when both partners want to buy out the other. The partnership agreement would need a provision that states who can purchase the business. In some cases, there may even be a coinflip to determine which partner can buy out the other.
If There Is No Resolution, the Entire Partnership Could Be in Jeopardy
Even though disputes cannot go on forever, there is always a chance that the prospect of the dissolution of the partnership will either get partners on the same page or keep them from taking steps to remove another partner. This is similar to the “mutually assured destruction” standoff between the United States and the Soviet Union in the Cold War. Neither party attacked the other with nuclear weapons because they knew that it would be the end for both of them if they did.
Perhaps the biggest risk that 50/50 partners face with a dispute is that a deadlock could lead to the end of the entire partnership. If the case ends up in litigation, a judge could order that the entire partnership be dissolved. A judge may not want to adopt a Solomon-esque approach of dividing the partnership and may simply rule that the partnership should end. Thus, each partner needs to consider exactly how far they want to take the dispute.
Contact an Experienced Partnership Disputes Lawyer
If you are involved in a partnership dispute, the key is to take a step back and try to be as objective about the situation as possible. There is not always one clear right answer, and you should consider various alternatives in the hopes of resolving the dispute. This is not to say that you need to continue working with someone when your partnership’s “shelf life” may have expired.
You should contact an experienced partnership dispute attorney early in the process to get the most effective legal help possible and to help you consider your options. Your lawyer can give you advice that can assist you in making crucial decisions regarding your partnership and its future.