Can My Business Partner Lock Me Out of My Own Business? The Answer is
Let’s answer the big question. Is it legal for a partner or partners to lock out another partner? That answer is “yes” under certain circumstances. If a partner has done harm to the business through misconduct or flagrant mismanagement, the other partner may take control and prevent the other partner from doing more damage. This falls under the business code as ‘fiduciary responsibility’. That can be somewhat subjective, but the failure better be flagrant if it is to stand up in court.
The reasoning goes like this. You and I are partners in a business. We both put in $100,000 to start our venture. We agree that you will manage operations and I will generate and manage sales. After 6 months of growth, the business begins to decline. Formerly happy customers won’t take my calls. I can’t figure out what’s going on until a customer tells me the truth. You make very crude jokes every time this customer calls in with a question. When I check with other customers, I find this is a common complaint and our customers are very upset. To prevent you from doing further harm to my investment, I can take action to keep you from interacting with our customers. Bam!
Locking you out isn’t the best way to handle the problem, but it is legal. If you decide to sue, remember that the courts are a big funhouse-type casino. Anything can happen. The only certainty is cost. Land in court and things get expensive. Winning is probably not going to be worth the cost.
Structure of Your Business Matters
There are no easy answers to this topic. Some partnership and operating agreements provide for a partner taking control. If the business is formed as a corporation, shareholders may have the ability to vote out a managing partner. It is a lot harder to prevail in court if multiple shareholders have agreed to remove you. Before anyone can help you, they will need to review your business documents.
“Even if you were removed because of something you did, you still have rights. You can’t lose your ownership unless you’ve committed crimes through the business.”
What Should You Do?
Get advice. Even if you are frozen out, you still own your stake in the business. That ownership comes with rights. You have a right to regular updates from whoever does the accounting. You must receive an annual statement from the business. And, you may have a good case against your partner.
Start by keeping your thoughts to yourself. Don’t threaten the other partner. Don’t push your partner toward lawyers! Once these things get into court, they get very, very expensive. You generally cannot recover legal fees if you win! Stay civil with all employees including the partner who locked you out.
Have your documents reviewed. That’s always going to be the first step. For someone to assist you, he will first need to understand the rules of engagement.
If you work with a mediator (I call myself a moderator), that person may be able to obtain some sort of agreement with your partner if there isn’t too much hostility. I’ve had some success in these cases because people are less defensive when talking to me. I work for the business with the goal of bringing peace to a tense situation.
I’ll know very early in the case whether things can be resolved without a court fight. If I see that my client is better off with a lawyer, I will make that recommendation immediately. But, if we can get things worked out at a fraction of the cost, why not try to moderate the problem before ‘lawyering up’?
Remember, it’s always better to avoid the fight than to battle it out and possibly lose. The fight is expensive, and winning might cost you everything.
Chris Reich, Partnership Moderator and Business Luminary