Brand Story – Key lessons about partnership dynamics and the need for a well-crafted partnership agreement.
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The recent legal battle between Daryl Hall and John Oates highlights key lessons about partnership dynamics and the need for a well-drafted partnership agreement. Although their conflict is based on assets from their creative collaboration, it reflects the problems that business partners often face when their relationship sours.
Partnership Dispute can be a Maneater
Yacht rock’s defining duo, Hall & Oates maintain a visible and audible presence in our social fabric. Like many artists, they benefit from their musical legacy by managing intellectual property and royalty rights through business partnerships.
Unfortunately, a major break in that partnership came with the recent temporary restraining order initiated by Daryl Hall. Hall alleges that John Oates tried to sell his ownership stake in their venture, Whole Oates Enterprises LLP, without first getting Hall’s approval. Hall claims the attempted sale violates the terms of their partnership agreement. Oates, through his legal team, responded that his actions were within the terms of the partnership agreement and that Hall “could have done the same thing himself.” Although their dispute was not ultimately settled, a judge temporarily blocked Oates from completing the proposed sale.
The partnership agreement for Whole Oates Enterprises LLP is not publicly available, so we can only extract its terms. However, whether a partner is permitted to sell his ownership interest without the permission of the other should not be a matter that requires resolution in court or arbitration. In addition to legal fees and stress, this kind of dispute can derail and potentially crater a pending transaction. Needless to say, Hall & Oates burns energy and resources like a flame that burns a candle.
You need to make your agreement stronger (and more open).
The person with whom the parties share ownership of assets or an operating business can be very personal. All business partners must share their expectations of how the venture will benefit them, but a shared vision of how to achieve that benefit is critical to a healthy partnership. Even without formal documentation, the original owners of a business venture often have a basic understanding of the nature of their enterprise and the nature of their relationship. They also usually have constructive lines of communication that set the stage for continued business operations, even when the owners disagree.
The personal nature of these relationships, as well as the mutual trust and confidence of the partners, is precisely why restrictions on the transfer of ownership are so important. Accordingly, a well-drafted partnership agreement, operating agreement, or shareholders’ agreement should allow business partners to agree at an early stage not only on decision-making and financial matters, but also on the conditions under which they can transfer ownership interests.
Here are a few key questions for business partners to consider:
- Can a partner transfer their interests during their lifetime? If so, to whom?
- Partners may agree on a limited universe of buyers that they are willing to manage the enterprise, but rarely feel comfortable with unlimited transfers.
- Should certain transfers trigger the right to receive transferred interest?
- Death is inevitable and transfers, direct or indirect, are inevitable. One of the best ways to guard against a deceased partner ending up doing business with an uncertain or rival family member is to provide an option to purchase the transferred interest upon death. Such an option can make it easier for partners to transfer the value of their interests while allowing the surviving partners to retain control of the venture.
- Should the interested party retain decision-making or management rights in the enterprise or simply participate in the economy?
- After the transfer, the resources to exercise the purchase option may not be available, or the partners may not wish to specify such an option in their governing documents. In either scenario, the partners may be willing to allow the transfer, provided that the transferred interest is limited to participation in the economics of the entity and not in decisions about the operation or management of the entity.
- Should transfer prohibitions apply not only to direct ownership of the entity, but also to beneficial ownership or control?
- Often the partner in a business venture is a corporation or trust. When the persons who own or control an entity or limited partner change, so that other persons gain control of the entity or limited partner, the other party to the entity, even if the parties directly own all of the interests, cannot agree with that partner. the initiative remains the same.
- Finally, should there be a mechanism for partners to withdraw from the partnership?
- As the argument between Hall & Oates shows, circumstances can change over time and partners can feel trapped. Planning ahead for business termination can be one of the most difficult aspects of setting up a new venture, but it can also give the parties an invaluable framework for parting ways if the relationship sours.
The Hall & Oates legal demonstration serves as a cautionary tale highlighting the value of a well-drafted contract governing a business partnership. Sometimes litigation is inevitable, but an agreement with clear and comprehensive terms allows partners to navigate stormy waters.
Brand stories are paid content articles that allow Oregon Business advertisers to share news about their organizations and connect with readers about business and public policy issues. Stories are produced in-house by the Oregon Business marketing department. For more information, contact associate publisher Courtney Kutzman.