In Saunders v. Firtel, as in Cline v. Grelock, the two business partners were close friends.[1] Firtel was the sole owner of a pharmaceutical sales corporation called Adco and Saunders was a sales representative for a medical supply company. In 1986, the two decided to enter into a formal business relationship by allowing Saunders to obtain a 49% shareholder interest in Adco and to become an employee of the company. Their written agreement provided that both would devote their time and efforts to the business and receive an equal combination of compensation and fringe benefits but also allowed Firtel to spend considerable time away and apart from the business. In 1999, Saunders and Firtel also formed a limited liability company called Barbur, in which each owned 50% interest, for purposes of owning and leasing certain real estate to Adco for an annual rent of $18,000.
From 1986 through July 2004, Saunders ran virtually all aspects of the company’s day-to-day operations. Not surprisingly, Saunders came to resent this arrangement, given that he was doing most of the work necessary to guarantee a profit but was dividing compensation equally with Firtel. In 2003, Saunders proposed that he be paid 50% of the income for running the business and that the other 50% be divided equally between the two shareholders. When Firtel failed to consider this proposed change, Saunders hired an attorney and formally notified Firtel that the current arrangement was no longer acceptable. This must have displeased Firtel, as he, acting in his capacity as president and majority stockholder, promptly terminated Saunders’ employment. Subsequently, Firtel made several unilateral decisions involving Barbur without consulting Saunders, who was still a 50% owner, including reduction of rental payments for Adco, a $5,000 loan from Barbur to Adco, and certain repairs of the premises. Saunders sued, seeking, among other things the judicial dissolution of Barbur.[2]
The trial court found in favor of Sanders and ordered a dissolution and winding up of Barbur. On appeal, Saunders argued that the trial court improperly ordered the dissolution because the business continued to function and the parties received equal distributions. The appeals court disagreed. The court said that the unilateral actions taken by Firtel supported the conclusion that it was not reasonably practicable to carry on the business of Barbur in accordance with the parties’ original agreement. The court also noted that Firtel did not equally compensate Saunders for distributions made on behalf of Barbur until after the lawsuit had commenced and that the two had ceased to have any business or personal relationship since Saunders hired an attorney in 2004. Accordingly, the court determined that it was not reasonably practicable for Saunders and Firtel to carry on the business of Barbur and affirmed the trial court’s order of dissolution.
What could Saunders and Firtel have done? Apart from the importance of having a well-written agreement, Saunders really could have benefited from having his own attorney to negotiate on his behalf and to look out for his best interests at the time of entering into a formal business relationship. While that might not seem necessary when things are going well with your business partner, this case is yet another reminder that it’s better to prepare than to regret.
This post was the third part of our multi-part series on business partnership, disagreement, and dissolution. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next and last post, we will discuss Mizrahi v. Cohen, a New York case.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
[1] Saunders v. Firtel, 978 A.2d 487 (Conn. Sup. Ct. 2009). Unless otherwise noted, all references to the case are to this citation.
[2] It is not clear from the opinion whether Saunders asserted any claim regarding his 49% interest in Adco.