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Business Partners

Expert: Alison R. Manzer

CDD asked:

What recourse does a business partner have when the majority partner begins to threaten a minority partner by withholding pay for services rendered for the company while the majority partner is involved in questionable acts within the business.

Alison R. Manzer answered:

Unfortunately this question is very difficult to answer in the format in which it was given, it is necessary to assume a number of legal and factual matters that may relate to the "partnership" in order to respond to the question. Initially if we assume that this is a general partnership, that is that there has not been a specialized form of partnership such as a limited partnership or a limited liability partnership created if it is a partnership, in law. Also this question is being answered in two ways, one that there is a true partnership and the second that the reference to a "partner" in fact is a reference to a fellow shareholder, and potentially officer and director, of an incorporated entity.

If the relationship between these two business partners is, at law, a partnership, the obligations between the partners are "fiduciary" in nature. This means that each partner owes to the other partner the highest possible duty of fairness, good faith, and conduct in their course of dealing. No partner can profit as to the results of the partnership at the cost of the other. Although it is possible for partners to agree between themselves to disproportionate sharing, other than as to that agreed sharing, the partners are equally entitled to participate in the management and control of the partnership, and must be treated to the high standard of fairness required by a fiduciary. If one partner is breaching those fiduciary responsibilities then the other partner has a number of rights at law.

Those rights include the possibility of terminating the partnership, and the ability to take legal action to require the other partner to satisfy their fiduciary obligations. Those fiduciary obligations would include a disgorgement of any profits improperly obtained by the partner, and a readjustment of the sharing of the results of the partnership. These rights can of course be varied by agreement; there is no indication in the question as to whether an agreement exists. Also, partners do not receive salary payment as an employee from a partnership, where they are a partner, but rather a draw against profits. This adds to the confusion of the question.

The reference to a "business partner" may reference a fellow shareholder, and possibly officer and director of a corporation. In that case, as between shareholders the appropriate law to look to is grounded in "oppression rights" which are statutorily enshrined rights in the Business Corporations Act of many jurisdictions. The jurisdiction that the corporation has been formed in is also missing from the question, but assuming a modern business corporation statute, most will include protection for a minority shareholder from the improper actions of a majority shareholder.

Oppression rights generally will give the right to apply to the court for a number of remedies; these remedies can include a buy out at fair market value, an order rectifying the oppressive conduct, requirement for winding-up and distribution of corporate assets, among others. The oppressive conduct would be reviewed, and the most suitable course of action for the shareholders, and the corporation, as a whole would usually be considered by the courts. If there has been a fundamental breakdown in the relationship then some form of a buy out arrangement would generally be considered the most suitable course of action.

In circumstances where the oppressive conduct can be rectified, and it appears that the relationship among the persons involved is such as to permit continuing business relations, then an order specifying conduct may be issued by a court, but this is a less common approach to the problem.

If the majority's partner's "questionable acts" amount to fraud, theft, or similar, then there may be an action capable of being taken by the minority shareholder exercising rights on behalf of the corporation. These rights would be for rectification of the conduct, and reimbursement to the corporation, of any losses arising from that conduct. This, where there is a majority shareholder involved, may be a more difficult course of action to follow.

The withholding of pay for services, if the relationship is properly one of employee and employer, can also give rights to the "minority partner" as an employee of the corporation. The relationship of a person to the corporation as employee, as shareholder, as officer, and as a director are separate relationships, and each can give rise to separate rights.

It is possible that the "minority partner" may be able to seek remedies in employment law, as an employee, in connection with the withholding of the pay for services. This is complicated somewhat if there is a significant shareholding relationship, or the "minority partner" is also an officer or a director. In those circumstances duties in those other capacities, if the corporation is insolvent, may result in a change to the rights of the individual as an employee. If the business relationship is a partnership this route is not available.

As can be seen from the above, a dispute among business partners, whether in true partnership or as shareholders of a closely-held corporation, gives rise to a number of very complex legal questions. The nature of the relationship, the nature of the course of conduct, the status of the relationship outside of the referenced enquiry, the jurisdiction where the entity resides, among other issues, can affect the response. This is truly a matter where legal assistance should be sought.

About the author

Alison R. Manzer works for Cassels Brock & Blackwell LLP.

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