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What happens when your business partner wants to leave? Do’s and Don’ts

It’s a simple fact of business life that you and your company’s fellow shareholders or members will not always see eye-to-eye. Furthermore, our personal lives change and that effects the level of willingness in which some participate in a business venture.

As in any relationship, businesses also reach that awkward stage in which a shareholder or member wants to leave his current business venture and start something new. We have discussed starting your business and provided guidelines for setting forth the rules for governing your business. This article addresses some of the difficulties that arise during the “break-up period.” For the purposes of this article, we will use the terms “shareholder” and “member” interchangeably, as well as the terms “director” and “managing member.”

We advise regularly that you should begin your new business with fully developed and executed operating agreements or shareholder agreements. Those agreements provide the rules for operating your company and should include “buy-sell” provisions to set forth the conditions permitting shareholders to sell their interest in the company.

In small companies, the shareholders are typically employees of the company, as well as directors of the company. In each of these roles, the shareholder/employee/director has a continuing responsibility to the company even though all parties know that shareholder/employee/director intends to leave the company and sell their interest in the company in the near future.

Employees of the company have a duty of loyalty so long as they are employed by the company. If one of the shareholder/employees intends to resign from employment with the company, until that employee is separated from the company, that employee cannot compete against her employer. Therefore, although an employee can make arrangements for new employment, that right is not absolute. Soliciting customers, or taking client lists prior to separation has been called a breach of the duty of loyalty by the Virginia Supreme Court.

Furthermore, if the shareholder/employee is also a director of the company, that director has a fiduciary duty to discharge his duties in accordance with his “good faith business judgment of the best interests of the . . . company.” Actions taken that benefit the personal interests of the director at the expense of the best interests of the company violate the director’s fiduciary duty to his company. Therefore, a director invites contentious litigation if he begins setting up his new business venture by soliciting customers and employees of his existing company, while still acting as director of his existing company.

Litigation involving these issues can get very complicated and very expensive. If one of your small business’ shareholders intends to sell their interest and leave the company, immediately contact your experienced business attorney to develop an exit plan that is consistent with your company’s operating agreement and consistent with Virginia law in order to avoid litigation and to ensure your company’s survival.

Tarley Robinson, PLC, Attorneys and Counsellors at Law

Williamsburg, Virginia

John Tarley

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John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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