Business Partnership Advisor
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Chris Reich, Business Luminary
It May Be Legal to Lock Your Partner Out of the Business
Chris, I need advice. My partner has been acting weird lately and we argue constantly. Can I lock him out of the business if I’m afraid he may take things?.
Locking Your Partner Out of the Business Is Generally Unwise Unless…
There are times when you legally can and should lock your partner out of the business. But, those are rare circumstances. Locking your partner out, even if your partner is showing bad behavior, open you to potential liability. Before taking such a drastic action, stop and ask yourself if our motives are completely in the interest of protecting the business and the interests of all the partners. If you are simply trying to take control, you could end up in big trouble.
How to Know If You Should Lock Your Partner Out
Let’s consider a case I worked on where it was justified to lock a partner out. The business is a small tech manufacturing company. Two friends started the business about 10 years ago. The business is fairly successful but could be doing a lot better. The partners share management responsibilities and work fairly well together. One of the partners has an on and off relationship with ‘weed’. When he is into it, he smokes all day and is in something of a functional stupor. He gets his work done but his partner worries about safety and liability in the shop.
The partners decide to expand the business by taking on an investor. In exchange for a sizable amount of money, the investor gains a 40% stake in the firm. The original partners are not concerned because the money will allow them to greatly expand the business and combined they still have control.
After about 30 days the investors comes by and sees the partner smoking pot. He’s extremely upset and tells the other partner that behavior like that is unacceptable. The three of them sit down for a meeting and the new partner demands that the pot smoker be fired at once. An argument ensues. The stoned partner leaves in anger. The other two partners call the lock-smith to change the locks. They change all the passwords and access to all business accounts.
This sets up a major dispute. The locked out partner demands his rights to access HIS business. The other two partners refuse to discuss the matter further. They inform him that he will no longer receive a salary effective immediately. He will receive an annual statement and his share of the profits. Discussion closed.
Who is right?
A case can be made that it was a good move to lock the guy out. He could have been injured and cost the company a lot of money. It’s against the typically to operate equipment in an impaired condition. Still, they could have talked with him, right? The investor could have sued for the return of his money. Or, maybe the two partners planned this as a means of taking the company. It’s very complicated.
In some circumstances it may be a good idea to lock your partner out of the business.
Chris Reich, Business Mediation Services
Mediation or Lawyers?
This case was very messy. I was contacted by the partner who was locked out. I reached out to the other two partners in an effort to open a mediation to work things out. They refused to talk. When partners will not talk, it’s necessary to get lawyers involved. That’s when things get very expensive.
If it can be proved that the guy was locked out in order for the other two partners to seize control, the pot smoking partner might have a chance at getting his job back. But even if they openly say they wanted rid of him, they may win anyway because they have the voting power to legally kick him out. It may not not be right or ethical but it is legal. They can’t take his ownership away but he has no right to a job. This is a common misunderstanding in partnerships. There is no right to work at the business. When there are more than 2 partners who add up to controlling votes, they can fire a partner.
50/50 Partnerships Are Trickier
In an equal partnership, you need a very strong case to lock out your partner. If you do so just to gain control, you may find yourself in hot water. If your partner has threatened you or threatened to harm business property, you may be justified in locking her out. In addition to changing the locks, you should contact your attorney and start the process of removing your partner from the business completely. If there is any hope for saving the partnership though behavior changes, get a third party involved.
In a business partnership, partners have a legal “duty of care” to look out for each other’s interests. You want to be careful of violating that by locking your partner out simply because you believe the business is better off without her.
There are solutions other than changing the locks. Get into mediation and a good mediator can document the process and the agreements reached to improve the situation. That protects you if your partner acts irrationally in the future.
Buyouts between partners are usually mired in things that people think are legal entitlements. Let’s look at the most common misconceptions around buyouts.