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Legal Question - Sale of a Company

Old 08-19-2018, 06:10 PM
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Default Legal Question - Sale of a Company

Let's say there's a company (partnership) owned by Partner A, B, and C. All 3 are equal owners but Partner A is managing partner. They decide to sell the company to John Smith LLC. John and Partner A are good friends and they do all the negotiating. Sale is finalized and everything is good.

About a year later Partner B and C find out Partner A had ownership in John Smith LLC. None of this info was disclosed during the sale so Partner A was selling the company to himself and his buddy.

Is this legal?

I'm not Partner A, B, C or John Smith so no need telling me to get off the internet and seek real legal advice

Last edited by Mako 234; 08-19-2018 at 06:15 PM.
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Old 08-19-2018, 06:59 PM
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It’s actionable fraud.
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Old 08-19-2018, 10:01 PM
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what does managing partner mean? as in, what does the operating agreement define it as and what special authority if any does that title hold?
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Old 08-19-2018, 10:20 PM
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Was the valuation of the company accurate? Was the price paid to partners B and C fair? If so, leave it alone. If B and C feel the price they recieved was severely undervalued, they have a case for failure to disclose. Whether they recover anything though is doubtful.
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Old 08-20-2018, 03:25 AM
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The problem with these situations is that winning a case like that can be expensive.
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Old 08-20-2018, 03:49 AM
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If the sale documents state that no party holds any interest in the other it's fraud. And, if the bylaws or operating agreement of the acquired company state that officers have fiduciary duties then it's also fraud.
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Old 08-20-2018, 03:56 AM
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A forensic accounting firm cost me $450/hr. I won the lawsuit but the accountants and lawyers did better then me. Maybe business was sold for fare market value. If it wasn’t then you must decide is it worth the fight
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Old 08-20-2018, 04:04 AM
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Originally Posted by Mako 234 View Post
Let's say there's a company (partnership) owned by Partner A, B, and C. All 3 are equal owners but Partner A is managing partner. They decide to sell the company to John Smith LLC. John and Partner A are good friends and they do all the negotiating. Sale is finalized and everything is good.

About a year later Partner B and C find out Partner A had ownership in John Smith LLC. None of this info was disclosed during the sale so Partner A was selling the company to himself and his buddy.

Is this legal?

I'm not Partner A, B, C or John Smith so no need telling me to get off the internet and seek real legal advice
Generally, fiduciary duties of loyalty and avoidance of conflicts of interest, disclosure, good faith, and fair dealing will be required of a partner with 1/3 ownership whether managing or general partner.
While "legal" is probably not the word I would choose, Partner A is on the wrong side of all of the above.

*** As far as taking action, the question really is what damages were incurred by B and C.
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Old 08-20-2018, 05:31 AM
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Originally Posted by mystery View Post
what does managing partner mean? as in, what does the operating agreement define it as and what special authority if any does that title hold?
It means Partner A signs the checks and controls the $
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Old 08-20-2018, 08:23 AM
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Originally Posted by Mako 234 View Post
It means Partner A signs the checks and controls the $
Still curious what the operating agreement actually defines the role as

Terrible idea to have a single signor in any business that is owned by more than one person
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Old 08-20-2018, 08:39 AM
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Originally Posted by mystery View Post
Still curious what the operating agreement actually defines the role as

Terrible idea to have a single signor in any business that is owned by more than one person
Not sure what the exact wording is but Partner A is listed as managing partner in the operating agreement. Partner B can also sign but Parter A is a CPA so he always handled the $.

B and C are related and A was a close family friend that worked with B and C for 30+ years.
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Old 08-20-2018, 08:42 AM
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Originally Posted by Mako 234 View Post
Not sure what the exact wording is but Partner A is listed as managing partner in the operating agreement. Partner B can also sign but Parter A is a CPA so he always handled the $.

B and C are related and A was a close family friend that worked with B and C for 30+ years.
Seems to be an odd ommission for a CPA. He should know better.
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Old 08-20-2018, 08:50 AM
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Originally Posted by chrispnet View Post
Seems to be an odd ommission for a CPA. He should know better.
It is odd and it seems like ownership in the new company should be disclosed. Although I don't know if it legally has to be disclosed. I think it was intentionally left out so B and C wouldn't know.
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Old 08-20-2018, 09:21 AM
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Originally Posted by Mako 234 View Post
It is odd and it seems like ownership in the new company should be disclosed. Although I don't know if it legally has to be disclosed. I think it was intentionally left out so B and C wouldn't know.
Was an attorney used to draw up the Purchase and Sale Agreement? Were there any agreement made by and between the partners? Was the attorney a completely independent party?
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Old 08-20-2018, 09:23 AM
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Originally Posted by chrispnet View Post
Seems to be an odd ommission for a CPA. He should know better.
Is he a member of AICPA or other organization? Could be an ethics complaint...
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Old 08-20-2018, 09:40 AM
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Originally Posted by mystery View Post
Was an attorney used to draw up the Purchase and Sale Agreement? Were there any agreement made by and between the partners? Was the attorney a completely independent party?
Buyer had an attorney and the sellers had their own attorney. I'm not aware of any agreements between the partners. Partial payments are due from the buyer over X amount of time which is spelled out in the contract. Each time a payment is received the partners each take 1/3.
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Old 08-20-2018, 09:44 AM
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Originally Posted by Mako 234 View Post
Let's say there's a company (partnership) owned by Partner A, B, and C. All 3 are equal owners but Partner A is managing partner. They decide to sell the company to John Smith LLC. John and Partner A are good friends and they do all the negotiating. Sale is finalized and everything is good.

About a year later Partner B and C find out Partner A had ownership in John Smith LLC. None of this info was disclosed during the sale so Partner A was selling the company to himself and his buddy.

Is this legal?

I'm not Partner A, B, C or John Smith so no need telling me to get off the internet and seek real legal advice
Partner A is a DB for not disclosing his stake in the acquiring company. We do not have enough details to opine on the legality of his lack of transparency.
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Old 08-20-2018, 09:48 AM
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Originally Posted by Mako 234 View Post
I'm not aware of any agreements between the partners.
Written partnership agreements are the norm for significant business ventures. Buy/sell and dissolution provisions would normally be included. It would be interesting to know what the partnership business was all about.
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Old 08-20-2018, 09:57 AM
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Originally Posted by Pez Vela View Post
Written partnership agreements are the norm for significant business ventures. Buy/sell and dissolution provisions would normally be included. It would be interesting to know what the partnership business was all about.
Yes, but I do not know the specifics of the partnership agreement. It is not my company. I just know all the people involved.
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Old 08-20-2018, 10:10 AM
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Originally Posted by Tireless View Post
Partner A is a DB for not disclosing his stake in the acquiring company. We do not have enough details to opine on the legality of his lack of transparency.
It has recently been discovered that Partner A is a huge DB. After working together for 30 years there was a close friendship and level of trust had been built. Partner A took advantage of that.
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