Legal Question in Business Law in California

Re: Partner leaving

Agreeing generally with Mr. Whipple's analysis, I have a couple of additional comments. (1) You mention that he started another venture. You don't mention any problem with this, but my experience is that the other person will often open a competing business, which may create legal rights for the corporation. (2) You mention that terms of the buy out have become a problem. From this, I assume that everyone is agreeable to a buy out and you are having difficulties coming to a final agreement. An attorney and/or mediator could be of great assistance with this by analyzing corporate documents and helping to negotiate a process to determine a fair agreement. Sometimes, if you can't agree to a number, by way of example, you can agree to a process to determine the number. Sort of like one kid gets to divide the candy bar and the other gets to choose his half first! (3) As to "recourse", your question does not provide any information that would suggest recourse. As Mr. Whipple previously pointed out, this is not a partnership where you can force a partition. You will want to have an attorney look at your organizational documents to determine possible options, including dissolution. What you want to do will be dependent on numerous factors, including but not limited to an analysis of the business itself and the legal rights of the corporation and its shareholders. I would be pleased to help you with this analysis and have prior experience with similar situations.

Re: Partner leaving

First, stop thinking of yourselves as partners. Corporations don't have partners, they have shareholders, directors and officers.

Then, focus on what agreements, contracts, understandings and legal formalities govern your situation. Take a good hard, close look at your bylaws, the minutes of your organizational meetings, the elections of directors, shareholder meeting minutes, everything of a legal nature that has transpired bot after and before the corporate papers were filed.

What do they show about the deal between the co-founders?

The owner (shareholder) who has chosen not to be active in the business nevertheless remains a stockholder. That's unlikely to change. Is this person a director? Probably, but not necessarily. (A corporation with two shareholders must have at least two directors). Look at the bylaws and the past processes.

If the departed person was previously participating in operations and drawing pay, look at all the aforesaid stuff and see if you can fire and replace him or her.

I'd seriously consider whether you, as a 50% owner and representing ???% of the board of directors, can issue additional stock. Maybe you can find a third person and sell him a 5% or so interest. Make sure this doesn't violate any agreements and that you have the power and authority to do so. Make sure the new shareholder pays in adequate consideration.

The new shareholder would be #3, I suppose, thus requiring a third director, so elect one and then you have control of the board, through your friend.

If you can't legally issue more stock to a tiebreaker, do at least keep in mind that the corporations code has provisions for breaking ties in the management of deadlocked corporations. They involve intercession of a judge, and are thus necessarily awkward, time-consuming and expensive.