Who gets the name in a business custody battle?

May 22, 2008: 9:20 AM ET

A business "pre-nup" could have helped these squabbling partners resolve their differing visions for expansion.

William Taylor, Denver, Colo.
My partner and I are having disagreements on how we'd like to expand our business. We currently operate a small restaurant. My idea is to open more locations. To do so, we'd have to bring on additional partners in these new ventures, which would mean we would not have the same amount of company shares in the new location. Currently, I'm the majority shareholder with 55% in the company stock, to her 45%. I have offered her the opportunity to expand with me. She's declined, saying she'd like to go out on her own, alone, and open another location with our current name. As a majority shareholder, can I protect the company name, and not allow her to operate a new location if I'm not involved?

By Shara Rutberg, Fortune Small Business contributor
Dear William:
First, you must understand that there are actually three entities involved in the venture: the two shareholders and the corporation, which is recognized as a legal person, says Fern O'Brien, a partner at Boulder, Colo.-based O'Brien & Zender PC who has extensive experience representing restaurant ventures.

The name of the company's restaurant is not owned by either shareholder, it's owned by the company.

"The majority stockholder essentially controls the company and, without his consent, the company may not allow the minority shareholder to use the company's business name," she says.

Typically, in a small business like yours, both shareholders are also the only members of the board of directors. Under corporate law, each director has a fiduciary duty called the "duty of loyalty" that requires them to act in good faith and in the best interests of the corporation, O'Brien explains. "A director must place the interests of the corporation before the director's own interests. She cannot usurp a corporate opportunity - in this case, starting a business that will conflict with the business of the company."

Having another restaurant with the same name operated completely independently would be confusing to the public, says attorney Donald A. Bertram of The Bertram Law Firm in Denver - and it could limit your ability to attract investors or franchisees.

"This and other potential problems between the two owners could have been addressed in a stockholder's purchase agreement, sort of a business pre-nuptial, at the time the company was formed," he says. "It will be much harder now that the two have very different ideas for the future." He recommends contacting an attorney to discuss your options.

One solution might be for you to agree to have the company license its name to your partner, suggests O'Brien. That way, you "could expand your business without bringing on a new shareholder, increase revenues through royalty payments, and give the minority shareholder the autonomy she is seeking," she says.

Give us your advice: Check out recent "Ask & Answer" questions.

Related links:

Blood feud: How can you fix a broken family business?

Two businesses, one marriage - can it work?

Growing an LLC: How to add partners

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