FAQs About Partnership, Shareholder Agreement and LLC Disputes - New York Partnership Law - by Erica Garay

by Meyer, Suozzi, English & Klein, P.C.


February 16, 2011

Written By: Erica Garay

Frequently Asked Questions about Partnership, Shareholder and LLC Disputes

Q: I am in a dispute with my partners, what should I do?

Get a copy of all agreements that the partners signed. Many people refer to their co-shareholders as “partners,” when in fact, they are not truly partners, but rather all shareholders in a corporation, or members of an LLC. Different rules apply for different types of business entities. So, the first step is to determine what you own.

Q: Okay, I checked, and I am a “partner” - now what?

If you truly have a partnership, the first step is to see if you have a Partnership Agreement. A partnership does not require a written agreement. If there is an agreement, then the partners are free to determine in that agreement their rights, including how and when and on what terms a partner can withdraw from a partnership.

If you do not have a written partnership agreement, then any partner can withdraw at any time under New York Partnership Law. By withdrawing, a partner is entitled to be bought out. The first step is to get an “accounting” which is a financial snapshot. Then, the bought out partner is to be paid for his share.

Q: My partners refuse to pay me, now what?

If your partners will not honor the agreement, or if you have no agreement, won’t honor New York’s common law and partnership statute, then you have a right to sue your partners to get an accounting and a monetary award for your partnership interest.

Q: I have a written partnership agreement that has an arbitration clause, now what?

If you have a partnership agreement that includes an agreement to arbitrate, then you need to serve a “notice of intent to arbitrate” and follow the steps of the arbitration clause. However, you may have certain remedies available in court, too, including an injunction in aid of arbitration, to protect bank accounts, for example, from a partner making improper withdrawals, or to prevent a partner from using partnership funds to pay for legal fees.

Q: My partners are excluding me from the business of the partnership and are refusing to let me see financial information, what can I do?

Every partner under the New York Partnership Law has a right to manage and be involved in the partnership and a right to see the books and records of the partnership. The right to manage, however, can be modified by a written partnership agreement. For example, a partnership could name a committee or a manager to be the managing arm of the partnership. You would, however, still have the right to review the partnership’s books and records.

Q: What is the difference between a general partnership and limited partnership?

New York permits a partnership to be a “limited partnership.” In a general partnership, all general partners have the right to manage and all have personal liability for the debts and obligations of the partnership. In a limited partnership, one partner is designated the general partner (and he has personal liability) and the other partners are “limited partners,” which means that their liability has been limited for exposure for partnership debts and obligations.

Q: Okay, I checked and I am a shareholder in a corporation. I’m feeling abused, now what?

Again, the first step is to look and see what agreements there are. If you have a shareholders’ agreement, then does it promise employment? Does it promise a role in management? You do not need to have a shareholders agreement, and if you do not have one, then the questions to ask are:

• how much stock do I own?

• has my role in the corporation changed?

• what payments am I getting from the Corporation?

• how much money are the other shareholders taking out? more than me?

As a shareholder, you have a right to the “reasonable expectations of your investment” in the corporation. That means that you have the right to return on your investment. A court will look at whether there is a history of dividends, or whether the shareholders are all just getting paid salaries. If you are a shareholder who does not work at the company, and you are not being paid dividends (and you are receiving no salary), a court may consider this “oppression.” Whether there is oppressive behavior, or not, is a question for the court to decide.

If you have no contract right to employment, then being fired may or may not be evidence of oppression.

Q: What remedies do I have if I am “oppressed”?

“Oppression” can be a basis for a shareholder lawsuit. In New York, if you own 20% of the stock of a privately held company (or collectively own 20% with one or more other shareholders), you can bring a suit that seeks to dissolve the corporation. This right is found in section 1104-a of the Business Corporation Law. A court will look at the facts and determine if the way the corporation is being...(see doc)

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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