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Don’t Let Your Business Partner Use the COVID-19 Pandemic to Hide Misconduct

Many business owners reading this article are facing a severe COVID-19-related economic downturn and simply struggling for survival. However, this does not describe all businesses. Some have been, and remain, closed completely. Some are better able to adapt to a remote environment than others, and some may even thrive in this environment. But what remains constant in a closely-held business with multiple owners is the temptation by the majority partner(s) to use an economic event such as this as a way to disguise what is nothing less than shareholder oppression.

Have We Seen This Before?

In the recession that began in 2008, majority owners of small, private companies would often use the collapse of the stock market and the economy as “cover” to make their company’s performance appear worse than it actually was, so any questionable transactions would remain hidden. Be aware that the same thing can happen today.

For example, one 75% owner of a mid-sized business started a competing company, taking about 40% of sales to the new business. Of course, the 25% owner not only had no ownership interest in the new entity but did not even know of its existence. When the minority owner became curious and started asking about the downturn in sales, he got generic answers about “the economy.” It was only after he saw an attorney and got a hold of the company’s books and records that he was able to discover something was amiss.

Can the Pandemic Affect My Business?

Ordinarily, it would be quite easy to conclude that business losses in the current environment are, of course, related to COVID-19. Not many businesses can weather being shut down for more than a month and even financially-sound companies are likely to suffer when a large segment of their customers and vendors are closed indefinitely. So, the explanation that the virus can account for the downturn will, in many instances, be the correct answer. But if you are reading this article, you are starting out from the premise that you likely do not trust your business partner, and the relationship is already strained. If you did not trust your partner when there was no crisis, and you had a good reason for doing so, there is little reason to suspect that the current situation will bring out his or her best, or change his or her fundamental nature. Now more than ever, you may need to protect yourself.

What Can a Minority Business Partner Do?

A starting point may be whether you are being kept “in the loop” on crisis measures being undertaken. Many companies are receiving or have received a Paycheck Protection Plan (“PPP”) check from the federal government. For many companies, that will be in the millions of dollars, or at least hundreds of thousands, and may make the difference between surviving and not. Has your partner even mentioned this to you? Does he or she plan on getting this money in the door and not even telling you about it? If you are not being given up-to-date financial information about a company in which you own a percentage in this current climate, and you previously had suspicions about your partner’s motives, this lack of transparency just might tell you all you need to know. However, transparency extends far beyond this most basic of information.

Your business may be impacted by the pandemic, but you are entitled to verify this. Don’t let your business partner take advantage of this opportunity to hide the very thing you were already suspicious of. Seek the advice of an experienced business divorce attorney to plan your next steps.

©2020 Norris McLaughlin P.A., All Rights ReservedNational Law Review, Volume X, Number 121

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About this Author

David C. Roberts Member  New Jersey fraud, fraudulent transfers, trade secret, restrictive covenant litigation, employment litigation, environmental matters, and insurance coverage litigation.
Member

David C. Roberts, Co-Chair of the firm’s Litigation Practice Group, devotes his practice to handling complex commercial litigation matters, such as fraud, fraudulent transfers, trade secret, restrictive covenant litigation, employment litigation, environmental matters, and insurance coverage litigation.

His practice has a particular emphasis on partnership and shareholder disputes, including oppression and dissenter’s rights cases, with a focus on attempting to resolve matters through mediation, if such an approach fits within client’s goals and objectives.  In 2007, Dave launched...

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