Partnership, LLC and Shareholder Disputes in the Bay Area and California

When co-owners of a closely held business fall out, the fight is about control and money. One owner runs the company; another wants a fair share of the profits or a fair price to leave. Reiser Law, P.C. represents partners, LLC members, minority shareholders, co-founders and their companies, as plaintiffs and defendants, in California state and federal courts and in arbitration. From our Walnut Creek office in Contra Costa County, we serve clients throughout the San Francisco Bay Area and across California. Our practice areas page describes the rest of our work.

What these disputes involve

An owner is removed as manager and locked out of the bank accounts. Members are allocated taxable income but receive no cash. The controlling owner's pay rises while profit shrinks. A partner steers an opportunity to a side company. Buy-sell terms and arbitration clauses in the governing agreement often decide how an exit is priced and where the case is heard.

Fiduciary duties among owners

Partners owe the partnership and each other duties of loyalty and care. Loyalty requires a partner to account for any benefit derived from the business or its property, including a diverted opportunity, and not to compete with it or deal with it on behalf of an adverse party. The duty of care is narrower: it reaches grossly negligent or reckless conduct, intentional misconduct and knowing violations of law. The same duties apply to members of a member-managed LLC and to the managers of a manager-managed LLC, whose members owe none solely by reason of membership. Cal. Corp. Code §§ 16404(a)-(c), 17704.09(a)-(c), (f).

In a corporation, majority shareholders owe the minority a fiduciary duty to use their control "in a fair, just, and equitable manner." Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 108 (1969). Some claims belong to the corporation and must be brought derivatively, as our article on California minority shareholder rights explains.

Books and records

A shareholder may inspect the accounting books, records and minutes on written demand, for a purpose reasonably related to the holder's interests as a shareholder. Partners, and former partners for the period they were partners, may inspect and copy partnership books and records. LLC members have similar rights to inspect required company records and obtain copies of its tax returns, and any waiver of those rights is unenforceable. If a corporation or LLC fails to comply without justification, the court may award reasonable expenses, including attorney's fees. Cal. Corp. Code §§ 1601(a)(1), 1604, 16403(b), 17704.10(b), (g)-(h).

Deadlock, dissolution and buyouts

Dissolution rules differ by entity. Holders of at least 33 1/3 percent of a corporation's shares or equity, not counting shares of anyone who took part in the alleged misconduct, may file, as may any shareholder of a close corporation. Grounds include deadlock, persistent and pervasive fraud, mismanagement or abuse of authority, and, in a corporation with 35 or fewer shareholders, a showing that liquidation is reasonably necessary to protect the rights or interests of the complaining shareholder. Any LLC manager or member may file on grounds that include deadlock or internal dissension. A partner may seek dissolution when another partner's conduct makes it not reasonably practicable to carry on the business with that partner. Cal. Corp. Code §§ 1800(a)(2), (b), 16801(5), 17707.03(a)-(b).

Unless the articles provide otherwise, the corporation, or if it declines, holders of 50 percent or more of the voting power, can avoid dissolution by buying the moving shareholders' shares for cash at fair value. In an LLC, the other members can buy the moving members' interests for cash at fair market value. If the sides cannot agree on price and the buyers post bond, the court stays the dissolution and fixes the value. Cal. Corp. Code §§ 2000(a)-(b), 17707.03(c)(1)-(2). From there, valuation drives the case.

Our team

Michael J. Reiser, the firm's founder, has been a member of the State Bar of California since 1988 and is admitted in the Ninth Circuit and the Northern, Central, Eastern and Southern Districts of California. Sean Svendsen, a member of the State Bar of California, handles California litigation with the firm from the Bay Area. Matthew W. Reiser and Isabella Martinez, based in Miami, are members of the State Bar of California and The Florida Bar, so a dispute spanning both states stays with one team.

Questions clients ask

I own a minority stake. Can I see the company's books?

Usually. Shareholders, partners and LLC members all have statutory inspection rights. A shareholder must demand inspection in writing, for a purpose reasonably related to the shareholder's interests.

My co-owner and I are deadlocked. What are our options?

Check the agreement for buy-sell terms or a deadlock procedure. Deadlock can also support dissolution of a corporation or LLC, and the other side can then buy out the owner who filed.

I was pushed out of a company I co-founded. Do I still have rights?

It depends on what you still own and what your agreements say. If you still hold shares or a membership interest, the rights above generally apply.

Talk to us

To discuss a dispute, call (925) 256-0400, email Michael J. Reiser at michael@reiserlaw.com or Sean Svendsen at sean@reiserlaw.com, or use our contact page. Our office is at 1990 North California Blvd, 8th Floor, Walnut Creek, CA 94596.

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