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Breaking Up Can Be Hard to Do Without Planning: Voluntary and Judicial Dissolutions of Partnerships

July 31, 2014

Posted in Business Litigation, Business Start Ups, Corporate Law, Partnership Law

When it comes to the dissolution of a limited partnership, you can do it the easy way or the hard way. Written into your partnership agreement, you can spell out how and under what circumstances your partnership can be voluntarily broken up, or you can go to court and have the judge decide it in a judicial dissolution.

Judicial Dissolution: The Hard Way

California’s Corporate Code §15908.02(a) allows limited partners to seek judicial dissolution “if it is not reasonably practicable to carry on the activities of the limited partnership in conformity with the partnership agreement.” Subdivision (b) states in part “[i]n any suit for judicial dissolution” the other partners may prevent dissolution of the business “by purchasing for cash the partnership interests owned by the partners so initiating the proceeding…at their fair market value.”

Other than this section of the law, or by spelling out buyout rights in the partnership agreement, a limited partner
cannot compel the buyout of other partners. In an appellate decision, the court in Cubalevic v. Superior Court (1966) 240 Cal.App.2d 557, 49 Cal.Rptr. 698, stated that “‘[t]here is no independent right on the part of one or more stockholders in a corporation to compel the sale to them of the shares of stock of another.’ ”

If the party or parties owning at least 50% of the shares of the partnership files in court for a judicial dissolution, if the other shareholders want to keep the entity going and buy out the others, they can file a petition to buy them out under §2000 of the California Corporate Code.

If it’s come to the point where a court gets involved, and especially in a case when an appellate court is involved, there is a complete breakdown amongst the various partners and there is much time, energy and money being expended through the legal process in order to determine the future of the business. All these resources being diverted away from operating a business could result in crippling or killing it.

Voluntary Dissolution: The Easy Way

When a partnership starts, often the parties involved seem to be on the same page, are excited and energized to start a new business that everyone thinks will be profitable (at some point). But entering into a partnership is like getting married and the parties would be wise to create a kind of prenuptial agreement for the business.

Given the potentially high stakes involved, all those involved should write into the partnership agreement the circumstances, means and methods by which a partnership can be dissolved and how the shares of a party can be purchased by others so the business can continue even if one or more parties are dissatisfied with what’s going on. This voluntary dissolution should be far less expensive, time and energy consuming and traumatic than going through the court system.

If you are currently involved with a partnership, or considering starting one, contact my office so we can discuss what you may not want to think about, how this business might end. In business, bad things do happen but with proper preparation, it may be far easier to adapt and move on afterwards.