Posting by Stewart Christ, MBA, Principal at BMC Associates
Not surprisingly, money lies at the heart of many of the business partner conflicts that arrive on BMC Associates’ doorstep. Some of those conflicts are simply about who deserves how much of the profits. Others are more complicated and relate to the fiduciary obligations of the partners. Many partners are unaware of their fiduciary obligations. But even when the partners are aware of these obligations, they rarely discuss them in a meaningful way.
Here are some blatant and some subtle examples of partners breaching their fiduciary duties:
- A partner running the out-of-state operations pays himself undisclosed “cash bonuses” that are not known to his two other partners.
- A sister in charge of managing the real estate assets for the family office buys a property for the estate that makes a property she owns personally more valuable.
- Two of the three partners in a microbrewery open a brewpub together in a nearby town without including their third partner in the discussions.
Understanding and discussing fiduciary duties is usually a first step in resolving such conflicts. Many entrepreneurs do not appreciate one important legal reality: People who begin acting like and calling themselves partners publicly may have unwittingly become partners without signing any legal documents. Without taking any specific steps to become partners, they may now be legally bound together and have actual fiduciary obligations to one another.
By “business partners” we generally mean co-owners of any type of closely held company. Principally, fiduciary duties include obligations of good faith, full disclosure, fair dealing, and undivided loyalty. While partners can include these obligations in their shareholder, operating, and other agreements, they are often found in places partners never see, like federal and state commercial laws. It is important to note that these duties are not just owed to the other partners in the company but also to the company itself.
Partners who own a majority interest in closely held companies may be more at risk for breaches of fiduciary responsibility than equal or minority owners because they are more prone to thinking of the business as “theirs” and they can do what they like. Nonetheless, majority owners owe a duty of loyalty to their minority owners even when they engage in transactions with their own company. Any time majority owners take unilateral action that could have a financial consequence on their minority owners, it raises the specter of a fiduciary duty.
Here are a few broad examples of possible conflict scenarios:
- Conveying business opportunities to another company.
- Starting a similar or related new business that excludes existing partners.
- Diverting actual or potential assets, revenue, or profits away from the existing partnership.
- Taking any actions that may bring benefit only to the majority partner, or that may actually harm the minority partner.
- Not fully disclosing opportunities and/or risks to partners when entering into a transaction, or making changes in company ownership.
The experiences and examples described above are intended to provide you with an understanding of the variety of fiduciary obligations you may have to your partner(s). For every obligation that you have, a possible partner conflict might arise. Please note that BMC does not provide legal advice, so for any legal guidance please consult your legal counsel.
While BMC does not provide any legal advice, we have helped many partners when they have discovered real breaches of fiduciary duties, or behavior that seemed like a breach of these duties. In these cases, we were providing conflict resolution services. It is better for partners, however, to engage up-front in thorough discussions and negotiations around fiduciary and other business and interpersonal responsibilities (see BMC Partnership Charters). There is no better way that we are aware of to reduce the risk of conflict than having a partner retreat, where you commit your time and attention to the wide range of issues that come along with being partners.