Did my partner cheat our firm?
How to handle a breach of loyalty.
C.G.
My business partner and I own our tech company (an S corp) as fifty-fifty shareholders, and we each hold board positions. Recently I learned that until two years ago, my partner was getting paid by one of the corporation’s clients, through a local university, to work in exactly the same technology that our company focuses on. This strikes me as a conflict of interest. What should I do?
By Adriana Gardella, Fortune Small Business staff writer
Dear C.G: Your instincts are correct. Directors and officers, such as your partner, are obligated to put the corporation’s interests above their own.
“One type of loyalty breach involves a director who takes advantage of an opportunity that should otherwise have come to the corporation,” says David Sokolow, who teaches business associations courses at the University of Texas School of Law in Austin. Because your partner’s extracurricular activities focused on the same technology your firm was developing, the chances seem high that the payments he pocketed could constitute such a breach.
Esther Barron, clinical assistant professor at Northwestern Law School in Chicago, says you should also find out whether your partner used any of the jointly owned company’s property or resources to perform his outside work. “To the extent he did, you may have ownership claims to any resulting developments or inventions,” she says.
As for next steps, Barron urges you to have a lawyer determine whether you have a cause of action and may be entitled to damages. Don’t delay: New York’s statute of limitations for a fiduciary-duty breach can be as short as three years. Also, consider ending your relationship. Says Sokolow: “Who wants to work with someone like that?”
This column provides general information only and is not intended to replace the services or legal advice of an attorney. Always consult a lawyer regarding any specific legal concerns, as laws vary from state to state.
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DiggYour partner is untactful, disloyal, and unfaithful person. Don’t deal with him anymore. If you have any damages from him you may find attorney. Your lawyer will help you to end your business contacts with this guy.
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I am sorry, but one MAJOR thing I am not seeing here is any mention of a Partnership agreement between the board members or founders of the company?
I mean, I am the Managing Partner of Net-Flow Solutions, and own the majority of the stock in the firm. However, anyone who is granted ownership of the stock besides myself, must sign extensive partnership agreements, even their spouses (in case of divorce the spouse gives up rights to cliam ownership) have to sign for them to become a stockholder.
Do you have this in place? If not, then good luck in dealing with your partner in the future if you have this distrust, and when you go to start a new company look into them before you choose a partner.