It is a well-worn expression that small businesses are the backbone of America’s economy. The truth is that most small businesses are started by individuals to give themselves a means of employment. And employment lasts as long as the business is profitable. However, too often entrepreneurs do not put in place the necessary legal mechanisms to deal effectively with the day when the profit ends or when one or more of the business partners want to leave.
Thirty years ago, a good friend informed me that he was forming a business with four other partners in a bucolic New England town. I recommended he make sure that they had a proper shareholders agreement for the new corporation to address disputes among the owners and other matters, e.g. buyout and dissolution. My friend, who had the touch of the iconoclast in him at the time, rejected that advice, saying he did not want to go into any business if they first had to get all wound up with prescriptive legal matters and legal expenses. In other words, he wanted to trust the business to each participant’s word and handshake.
Several years later, internal disputes grew out of control, despite the business being profitable. In the end the business was shuttered in the wake of several bitter law suits among the shareholders. So much for their handshake agreement.
Often times, an internal dispute is a matter of one partner shareholder having had enough of the business, for whatever reason, and wants to close it to cash out his investment, while the other partner shareholder wants to keep the business going. Without a shareholder agreement in place (or an operating agreement for a limited liability company [ an “LLC” company]), disputing shareholders are thrown back on what the law or a court will permit. Under New York’s Business Corporation Law, § 1104(a), a court can grant dissolution of a corporation if the company’s owners are deadlocked and cannot make operational decisions. One might assume that where one shareholder wants to close the company and the other wants to keep it operating creates a deadlocked situation. Well, that’s not necessarily the case, according to the recent decision in: Matter of Ades v. A&E Stores, Inc., New York Supreme Court, New York County, Index No. 650267/2017, decided January 23, 2018.
Continue reading “WHEN A HANDSHAKE IS NOT ENOUGH — Cashing Out One’s Interest in a Business, or Not”
