This is the first of a three part series on disputes between business owners in New Hampshire and Massachusetts. Co-Owners of a business; whether it be a corporation, limited liability company or otherwise, in New Hampshire and Massachusetts have fiduciary obligations to each other as well as to the company. When one or more of them decide to leave the relationship, the animosity related to that breakup can be akin to the animosity in a marital divorce and it is for that reason that attorneys often refer to these breakups a “corporate divorces.”
One of the strategies a majority owner, or two or more owners who together have a majority ownership, used against minority owner desired to be forced out is to deny that minority owner his bonus or full share of the profits. In particular, in professional associations, the compensation structure is often based on a set base salary plus the sharing of the company profit calculated through a formula based, at least in part, upon the professional’s contribution to that company profit for a particular year. If some of the co-owners decide that the owner they want out contributed a great deal of the revenues towards the profit of that year and envision him to be out of the company by the following year, those co-owners may try to delay billing or collection from customers during that year so that the revenues that would come from next year or pay an expense, that would normally be paid next year, this year to decrease the net income and therefore profit. However even if the compensation agreement does not specifically prohibit such conduct, every contract in New Hampshire and Massachusetts has an implied duty of good faith and fair dealing. Playing games with expenses or revenues to decrease compensation of a co-owner would not only be a breach of fiduciary duties to that owner, but also likely to be determined by a judge to be a breach the implied duty of good faith and fair dealing with the co-owner under their compensation agreement. This action could also be considered part of an attempted freeze out of the co-owner denying him the benefits of ownership in the business which includes the compensation agreement between the owners as employees.
If an employee / co-owner is not pulling his weight, before any termination of his employment, there should be a review of his Employment Agreement, if he has one, to determine under what circumstances he can be terminated. If he does not have an employment agreement, as a co-owner it would be a mistake to believe that he is merely an employee at will who can be fired without or without cause and with or without notice like non-owner employees. Documenting performance problems would be important and depending on what those performance problems are a decision should be made as to whether the employee should be put onto a corrective action plan. Some actions cannot be corrected, such as dishonesty. If the performance deficit is that if the minority owner employee has been making material misrepresentations to customers or embezzling from the company that would be treated substantially differently by a judge than the minority owner employee being marginally below his sales quota.
J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].