Lawsuits Don’t Often Make Your Dreams Come True | Tonkon Torp LLP

The recent legal clash between Daryl Hall and John Oates highlights key lessons about partnership dynamics and the necessity for a well-crafted partnership agreement. Their conflict, while centered on assets derived from their creative collaborations, mirrors challenges that business partners often face when their relationship deteriorates.

A Partnership Dispute Can Be a Maneater

The defining duo of yacht rock, Hall & Oates maintain a visible and audible presence in our social fabric. Like many artists, they reap the benefit of their musical legacy by managing their intellectual property and royalty rights through a business partnership.

Unfortunately, a fundamental breakdown in that partnership has come to light with the recent temporary restraining order action initiated by Daryl Hall. Hall claims that John Oates attempted to sell his ownership stake in their venture, Whole Oates Enterprises LLP, without first seeking Hall’s approval. Hall alleges that the attempted sale violates the terms of their partnership agreement. Oates, through his legal team, responded that his actions complied with the partnership agreement’s terms and that Hall “could have done the exact same thing himself.” Although their dispute has not been finally resolved, a judge temporarily blocked Oates from consummating his proposed sale.

The partnership agreement for Whole Oates Enterprises LLP is not publicly available, so we can only infer its terms. Nonetheless, whether one partner is permitted to sell their ownership stake without the other’s permission should not be a matter that requires resolution through a lawsuit or arbitration. In addition to legal fees and stress, this type of dispute can disrupt, and potentially crater, a pending transaction. Needless to say, Hall & Oates are burning energy and resources like a flame that burns a candle.

Gotta Make Your Agreement Be Stronger (and More Explicit)

With whom parties share ownership of assets or an operating business can be very personal. All business partners should share an expectation that their venture will benefit them, but a shared vision for how to achieve that benefit is critical for a healthy partnership. Even without formal documentation, the initial owners of a business venture often have a baseline understanding of the nature of their venture and the nature of their relationship. They also typically have constructive lines of communication that provide a foundation for continued business operations, even when the owners do not agree.

The personal nature of these relationships, as well as the faith and trust that partners put in one another, is precisely why limits on transfers of ownership are critical. Accordingly, a well-crafted partnership agreement, operating agreement, or stockholders agreement should enable business partners to align at the outset not only about decision-making and financial matters, but also regarding the circumstances in which they can transfer ownership interests.

Here are a few key questions business partners should consider:

1. May a partner transfer their interests during their lifetime? If so, to whom?
2. Partners may agree on a limited universe of recipients with whom they would be willing to operate a venture, but it’s rare that they feel comfortable with unlimited transfers.
3. Should certain transfers trigger a right to purchase the transferred interest?
4. Death is inevitable, and direct or indirect transfers are unavoidable. One of the best ways to control against ending up in business with a deceased partner’s unsophisticated or adversarial family member is to grant an option to purchase the transferred interest following death. This type of option can facilitate partners transferring the value of their interest while enabling the surviving partners to retain control of the venture.
5. Should a recipient of an interest retain decision-making or managerial rights in the venture, or merely participate in the economics?
6. Resources may not be available to exercise a purchase option following a transfer, or the partners may be unwilling to establish such an option in their governing documents. In either scenario, partners may be willing to permit the transfer, provided that the transferred interest is limited so that it participates in the economics of the venture, but not decisions relating to the venture’s operation or management.
7. Should prohibitions on transfer apply not only to direct ownership of the venture, but also beneficial ownership or control?
8. Many times the partner in a business venture is an entity or trust. When the individuals who own or control an entity or trust partner change, so that other individuals gain control over the entity or trust partner, another party to the venture may find itself unaligned with that partner, even though the parties who directly own all interests in the venture remain the same.
9. Finally, should there be a mechanism for partners to exit the partnership?
10. As the dispute among Hall & Oates demonstrates, circumstances may change over time, and partners may feel trapped. Planning in advance for winding up a business venture can be one of the most challenging aspects of organizing a new venture, but it can also give parties an invaluable framework for parting ways should the relationship sour.

The Hall & Oates legal showdown serves as a cautionary tale, highlighting the value of a well-drafted agreement governing a business partnership. Sometimes litigation is unavoidable, but an agreement with clear and comprehensive terms enables partners to navigate turbulent waters.

Story originally seen here