Category Archives: Shareholder litigation

TERMINATING A BUSINESS PARTNER: MAKING THE BEST OF A BAD SITUATION

A significant portion of the Bourque Law Firm’s practice is devoted to litigating business disputes, including shareholder and contract disputes. This edition of the HR Law Insider discusses the all too frequent situation where owners of a business clash and a decision is made to terminate a co-owner’s employment.

THE HARDEST DECISION:  TO END A RELATIONSHIP

One of the toughest decisions a business owner can make is to terminate a co-owner’s employment.  Making such a decision will not only end someone’s job, it will likely fracture or destroy a relationship.  Given the rights afforded to minority business owners, the decision to relieve a co-owner of his or her job should be carefully thought out.

ARIZONA IS AN “AT-WILL” EMPLOYMENT STATE

Absent an agreement providing for a definite term of employment or  mandating termination only for cause, employment in Arizona is terminable at-will.

Under the Arizona Employment Act, an employee has a claim against an employer for termination of employment ONLY if one or more of the following circumstances have occurred:

(a) The employer has terminated the employment relationship of an employee in breach of an employment contract.

(b) The employer has terminated the employment relationship of an employee in violation of an Arizona statute.

(c) The employer has terminated the employment relationship of an employee in retaliation for certain conduct.  For example, it is unlawful to terminate an employee for:

  • The refusal by the employee to commit an act or omission that would violate the Constitution of Arizona or its statutes.
  • The disclosure by the employee in a reasonable manner that the employee has information or a reasonable belief that the employer, or an employee of the employer, has violated, is violating or will violate the Constitution of Arizona or an Arizona statute to either the employer or a representative of the employer who the employee reasonably believes is in a managerial or supervisory position and has the authority to investigate the information provided by the employee and to take action to prevent further violations of the Constitution of Arizona or  an Arizona statute.

Thus, employees in Arizona have very limited rights to bring wrongful discharge claims (in addition to any potential claims under federal law).

DOES THE AT-WILL DOCTRINE APPLY TO CO-OWNERS? 

The at-will doctrine does indeed apply to co-owners of a business.  Absent an agreement that entitles a minority co-owner to continued employment, the co-owner’s employment is terminable at-will.

Before deciding whether to terminate a co-owner’s employment, a majority owner(s) should consider:

*  Is there a potential agreement which gives the co-owner employment rights, such as an employment agreement, a shareholder’s agreement, a buy-sell agreement, or company bylaws?

*  Would termination potentially violate any Arizona statute?

*  Would termination potentially violate any federal statute?

*  Would termination arguably be in retaliation for the employee’s protected conduct?

*  What corporate formalities, if any, need to be followed?

BE PREPARED FOR THE AFTERMATH

In the “typical” employee discharge situation, the relationship ends and the parties go their separate ways.  This is not the case when the parties remain co-owners — still attached at the proverbial hip.

Terminated co-owners are often very unhappy.  When terminating a co-owner’s employment, assume that the fired co-owner will vigorously and aggressively exercise his or her rights.  It is therefore critical to treat co-owners fairly, comply with all agreements, and to follow corporate formalities.  In short, be prepared beforehand.

THE CORPORATE LAW INSIDER

Arizona has a number of statutes that protect corporate shareholders and members of limited liability companies.  Visit http://corporatelawinsider.com/ for one such example:  corporate shareholders  — whether employees or not — are entitled to obtain substantial documents and information about the corporation’s financial and business affairs.