Can You Remove a Business Partner for Bad Behavior?

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Can You Remove a Business Partner for Bad Behavior?

If your business partner has behaved in ways that have adversely impacted your business, you are likely to want to cut ties but may be unsure about how to proceed. As is the case in many areas of the law, the answer is, it depends.

First, you need to look at the nature of your partnership from a legal perspective. Did you form a limited liability partnership, an LLC, or a corporation? Or did you just have an informal agreement? Did you execute a formal partnership or operating agreement? If so, it should address the dissolution of the partnership and what steps must be taken to remove a partner.

If there is no formal agreement, things can get complicated. You may need to consult state statutes for the default rules on dissolving partnerships or build a case based on written communications (letters, emails, texts, etc.) that reflect the original intentions for the partnership.

Absent that formal agreement and any expulsion clause, Arizona Revised Statutes 29-1051 will likely govern the removal of the partner. This statute states that a partner can be removed from the partnership if any of these circumstances apply:

  1. The partnership’s having notice of the partner’s express will to withdraw as a partner or on a later date specified by the partner.
  2. An event agreed to in the partnership agreement as causing the partner’s dissociation.
  3. The partner’s expulsion pursuant to the partnership agreement.
  4. The partner’s expulsion by the unanimous vote of the other partners if either:

(a) It is unlawful to carry on the partnership business with that partner.

(b) There has been a transfer of all or substantially all of that partner’s transferable interest in the partnership, other than a transfer for security purposes that has not been foreclosed, or a court order charging the partner’s interest, that has not been foreclosed.

(c) Within ninety days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business.

(d) A partnership, limited partnership or limited liability company that is a partner has been dissolved and its business is being wound up.

  1. On application by the partnership or another partner, the partner’s expulsion by judicial determination because either:

(a) The partner engaged in wrongful conduct that adversely and materially affected the partnership business.

(b) The partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under section 29-1034.

(c) The partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner.

As you can see from the language of the statute, you have a couple of options. You are allowed to remove a partner by a vote of all partners if it becomes unlawful for you to continue to do business with the rogue partner. The partner may also be removed by judicial decision if it is proven that the partner’s wrongful conduct has adversely affected the company or it is no longer practical for the other partners to continue to work with the bad actor (e.g., if he or she is in jail).

At Williams Mestaz, L.L.P., we focus our efforts on representing your business interests throughout the duration of your case, including disputes arising from the bad actions of your business partner. When you need help that only an experienced business litigation attorney can offer you, contact Williams Mestaz, L.L.P., at (602) 256-9400.

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