Its hard to believe that my 25th anniversary of practicing law (and handling partnership/shareholder disputes) would be like this. The COVID-19 pandemic has set off a wave of conflict between partners/shareholders/members of businesses in New Jersey. As such, festering problems have surfaced that, in some cases, went unaddressed for many years.

Today, I write about what to do with rogue partners or shareholders. The bad actors who have walked away from the business (say, in response to a request for capital) and have decided that they will simply start a new, competing business (using your organization’s goodwill to do so).

Know the Law

In our experience, even sophisticated business persons with the ability to pay for high level legal advice have a warped sense of what is permissible. Many do not understand that, separate and apart from the legal agreements that may exist for your LLC, partnership, or corporation, there is a body of common law which provides “rules of the game” as to what is permissible and what is not.

For instance, let’s take a shareholder who has historically served as a director of the corporation, has served as an officer, and has been highly compensated for many years. Can he abruptly resign his board, officer and employment positions, and form a new company, drawing on the corporation’s clients? The answer is full of complications. However, generally speaking, that departing shareholder must be very careful not to expose himself to legal liability. This is true regardless of whether there is a non-compete or non-solicitation in his agreement.

Get Help Against Rogue Shareholders

The analysis of what is permissible is a complicated one. Further, it should only be done with the guidance of attorneys who have experience in this area of practice. Plaintiffs contemplating suit against co-members or partners for breach of fiduciary duty must carefully plan strategy and the types of potential claims. Likewise, have an understanding as to the potential success of those claims before you make them. Also, immediately get legal counsel involved to help develop strategies to protect your client base from rogue shareholders and partners.

If you are contemplating a lawsuit against rogue shareholders or members, you should carefully look at the governing documents. The documents include shareholder agreements, operating agreements and others. Then, consider the pros and cons of each potential course of action, and plans for making all appropriate claims.

Please contact me for help handling a partnership dispute, or with any other business owner issues.