Business thrives on promises made with good intentions and integrity. When those promises are committed to signed documents, they become contractual obligations that compel the parties to live up to their promises even though good intentions and integrity may wane.
When promises made in good faith are subsequently discarded in the wake of ego and personal conflict, it’s likely that business disputes will arise. Sometimes those disputes can be resolved with calm reasoning, but often, litigation is needed instead.
Promises lead to shareholder dispute
James* was a young and successful corporate counsel when he was recruited by a fledgling beauty-services franchise company. At first, James was hesitant to leave his corporate position (and take a salary cut in doing so), but the promise of partial ownership was enough to lure him into taking a chance.
James’s primary job was to attract new investors, and he did his job well. Within his first year, James attracted several new investors and the franchise opened a half-dozen new outlets. Sam*, the company’s founder and majority owner, was so impressed with James’s performance that he increased the ownership incentive from three to five percent. As prospects exponentially grew, the franchise took off.
During this time, Sam was in dispute with the company’s former owner, and assured James that they would complete the proper ownership paperwork once that dispute was resolved. Being young and eager to succeed in his role, James trusted Sam’s word.
Then one day, out of the blue, James was fired—and he was denied any percentage of ownership for his contributions to the company’s growth.
He hired us to represent him in this business dispute resolution.
Promises and paperwork
Sam denied James the ownership share he had earned based on the claim that he had not signed a “unit grant agreement,” a document that would have set forth a vesting schedule for James’s units. Without that signed document, Sam contended, James had no rights of ownership.
We disagreed. James had signed an operating agreement when he first joined the company, and he had met the performance criteria to be granted five-percent ownership.
We began with a demand letter, seeking only to negotiate a reasonable settlement. The owner essentially told us to go fly a kite.
Shareholder dispute requires arbitration
The case involved years of arbitration. Sam and his franchise group did everything they could to deny James’s right to ownership.
The case became more complicated when the company was purchased by a private equity firm. No portion of the sale was designated to James, who should have received five percent of the asset sale in cash or stock.
In 2010, we filed for arbitration that didn’t begin until 2015, and then took two years to complete. The case required extensive discovery on our part, including tracking down the company’s prior attorneys and getting testimony from them supporting the claim that the promise of ownership had, in fact, been extended to James.
Ultimately, the arbitrators agreed with our position and granted James a cash equivalent of five percent of the asset purchase, plus court and attorney fees. It was vindication for the work James had done for the company—and fulfillment of the promises that had been made to him.
Years could have been saved with a signature
In the end, James won his case and received the equity value he had earned. But it came at a steep personal price. For five years James struggled to find employment, as his reputation had been extensively damaged by his former partner. Having left a secure job for this opportunity, he faced the challenge of having to reevaluate his career path.
Had a unit grant agreement been completed and executed prior to James joining the company, he very well could have avoided the civil litigation that was necessary for him to be awarded his promised share.
New partnerships often come with the glow of optimism, opportunity, and trust. Unfortunately, that glow can fade with time and with the intrusion of personality conflicts, sometimes driven by greed or jealousy. The best protection against broken promises is to be sure to get all the necessary documents signed before entering into an employment or a business arrangement.
If issues arise regarding a business or shareholder dispute and you suspect that you may have been victimized, contact the Ohio civil litigation attorneys at Cooper & Elliott. We are here to help.
*Names in this article have been changed to protect our client’s privacy.
The outcome of any client’s case will depend on the particular legal and factual circumstances of the case.