Like a divorce, a breakdown in a business partnership can be messy and traumatic. Partnerships are often fraught with angst, disagreements and problems. So when the breakdown comes, it has to be managed in a certain way.
The Young Entrepreneur Council has some good advice on how to handle a bust up.
First, start every partnership with a solid contract outlining exit plans in advance. Write up a simple understanding with an exit clause built in for each partner. Then you can go back to the partnership agreement or other business documents that detail the structure of the business. The document should spell out how disagreements or severance is handled. Secondly when it comes to financial resolution, err on the side of generosity rather than risk litigation by being greedy or spiteful when ending a business relationship. Don't let the past cloud the way you handle the situation. Think about the best way to end it to benefit your company in the future. Also when entering a partnership, get a pre-nup. That way, no matter how heated things get, both you and your partner are protected and forced to abide by terms upon which you agreed when cooler heads prevailed. And if you define a set of mutual desired outcomes and then operate from a place of mutual fairness, you can generally find an amicable resolution to any business partnership that has come to an end.
Gerard Magner, a partner at Hall & Wilcox. says when things can’t be worked out amicably, it usually goes to litigation where one of the parties institutes proceedings under the ‘oppressive conduct' provisions of the Corporations Act, or brings on proceedings in respect of the breach of a director's duty; or brings an application to wind up the company, and in some cases, all three.
Examples of oppressive conduct include an unfair allocation or restrictions on the payment of dividends to particular shareholders, refusing access to information about the company's affairs, use of company funds for improper purposes - for example personal expenditure - denying directors the opportunity to carry out their functions - for example failing to call directors' meetings when required - a combination of the inability to sell out of a private company where improper exclusion from management has occurred and there is no reasonable offer to buy the oppressed party's shares; and paying excessive remuneration to the person having control of the company.
If nothing else, the prospect of winding up the company might force the parties to negotiate, he says.
Magner says: “In the same way as the breakdown of trust and confidence between partners justifies a court exercising its power to dissolve a partnership, so too does the court consider it appropriate to use its power under section 461 to effectively end a corporate "partnership" that has gone the same way…A court will do its utmost to avoid winding up a solvent company, particularly when employees will be affected, perhaps by ordering early mediation, but ultimately will wind up if there is no other way. However, from a tactical point of view, the mere foreshadowing of such a proceeding may force the recalcitrant party to the negotiating table.”
Have you ever experienced a partnership breakdown? How did you handle it?