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How to Protect Yourself When Things Fall Apart (Part III)

McBride Law Blog

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In Saunders v. Firtel, as in Cline v. Grelock, the two business partners were close friends. [1] Firtel was the sole owner of Adco, a pharmaceutical sales corporation and Saunders worked as a sales representative for a medical supply company.  In 1986, the two agreed to enter into a formal business relationship which included Saunders to obtain a 49% shareholder interest in Adco and to become an employee of the company.  This written agreement allowed for both of them to devote their time and efforts to the business and split an equal compensation and fringe benefits but also did allow Firtel to spend substantial time away from the business.  In 1999, Saunders and Firtel also formed Barbur, a limited liability company, in which each owned 50% interest, for purposes of owning and leasing certain real estate to Adco for an annual rent.

From 1986 through July 2004, Saunders ran the company’s day-to-day operations.  However, Saunders became resentful of this arrangement, since he was doing most of the work necessary to gain a profit but was having to divide the compensation equally with Firtel.  In 2003, Saunders suggested that he be paid 50% of the income for running the business and that the other 50% be divided equally between the two shareholders.  When Firtel did not accept this suggestion, Saunders hired an attorney to formally notify Firtel that the current arrangement was no longer acceptable to him.  Firtel responded by acting in his capacity as president and majority stockholder, promptly terminated Saunders’ employment.  Then, Firtel made several unilateral decisions involving Barbur without discussing it with Saunders, who was still a 50% owner, including reduction of rental payments for Adco, a $5,000 loan from Barbur to Adco, and certain repairs of the premises.  Saunders sued, seeking, among other things the judicial dissolution of Barbur. [2]

The trial court ordered a dissolution and winding up of Barbur.  On appeal, Saunders argued that the trial court improperly ordered the dissolution because the business continued to function and the parties received equal distributions.  The appeals court disagreed.  The court said that the unilateral actions taken by Firtel demonstrated that it was not reasonably practicable to carry on the business of Barbur as agreed upon previously in the parties’ original agreement.  In addition, the court noted that Firtel did not equally compensate Saunders for distributions made on behalf of Barbur until after the lawsuit had started and that the two had stopped having any business or personal relationship since Saunders hired an attorney.  Hence, the court determined that it was not reasonably practicable for Saunders and Firtel to carry on the business of Barbur and the trial court’s order of dissolution was affirmed.

What could Saunders and Firtel have done differently?  Although they a well-written agreement, Saunders really could have benefited from having his own attorney to negotiate on his behalf and to look out for his best interests at the time of entering into a formal business relationship.  Even though that might not seem necessary when things are going well with your business partner, this case is yet another reminder that it’s better to prepare than to regret.

This post was the third part of our multi-part series on business partnership, disagreement, and dissolution.  You can find the other posts by searching our blogs.

This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Ryan Stricker.

About the Author

Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.

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Posted In: Minority Shareholders, Multiple Owners

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.


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