How do I get rid of a partner that does not want to go?

Hopefully your business runs great and your only problem is choosing which Ferrari model to buy with all of your profits.  But sometimes things aren’t working out between partners and someone has to go.  Be it the partner who has not pulled his weight lately, or stark differences between management styles, there are reasons to get rid of a partner who is hindering your business.  The following are some of the larger items to contemplate when deciding how to get rid of a partner.

Is the partnership an at-will partnership or a term partnership?  If a term partnership, absent a breach of fiduciary duties or gross negligence, an involuntary expulsion of a partner is unlikely.

 

Does your state recognize a duty of good faith and fair dealing in the context of an at will partnership.  If the state does not recognize the good faith and fair dealing duty in the context of an at will partnership, then like any employer, a partnership can get rid of one of the partners for any cause, or no cause at all, without liability to the partnership.

 

Most states however recognize a duty of good faith and fair dealing when a partner is involuntarily expelled.   Partners must have a bona fide or good faith reason for getting rid of an existing partner.  If these duties are breached, the partnership agreement is violated, and the expelled partner has a cause of action against the partnership for bad faith expulsion.   That partner then might be able to argue they were expelled for a predatory purpose such as increasing the employee to partner ratio.

 

What does your partnership agreement say regarding the matter?  Does it allow for only voluntary expulsion, or is involuntary expulsion permitted?  If involuntary expulsion is permitted, makes sure the partnership agreement provisions are followed.  Hold the proper meetings, get the required votes, and document the good faith reason(s) for doing so.  Be ready to pay that partner for their equity in the partnership and have on hand reasonable estimates of the partnership’s value.

 

If an expulsion is carried out in an at-will partnership, rather than following harsh severance provisions to the letter, step back the severity if possible.  For instance, if the partnership agreement allows the remaining partners to cut off the unwanted partner right away, consider recommending a step-down severance over a couple of months.  Similar actions will give the remaining partners more fodder to defend their decisions in court if a suit arises.

 

Consult local counsel and your jurisdiction’s statutory provisions regarding involuntary partner expulsions to determine what other steps are necessary.

 

 

Picture by: Moyan Brenn