University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

432

Pages:

2
Author:

bratrochanter

In this section, the text emphasizes the importance of a clear partnership agreement and addresses how a partnership agreement's language can influence the handling of disputes and partner dissociation. Key takeaways and case insights include: 1. Drafting for Partner Removal Rights: o The Schwartz v. Family Dental Group case shows the need to precisely articulate terms in a partnership agreement, particularly regarding the conditions under which partners can be terminated. The court found that, under the specific language in §12(a)(i), the agreement allowed partners to terminate another partner without cause if a majority vote was achieved, reversing a lower court's ruling that such a termination without a reasonable cause was unconscionable. This decision reinforces that courts prioritize contract freedom, assuming that educated parties understand and agree to the terms upon signing, even if one party later finds the terms disadvantageous. 2. Implications of Partner Dissociation Terms: o A well-defined partnership agreement can prevent misunderstandings by setting explicit rules for voluntary and involuntary termination, retirement, death, or incapacity of partners. The agreement should clarify whether a partner can be removed "without cause" and what compensation, if any, the departing partner is entitled to. The language should also outline how the valuation of a departing partner’s share is determined, avoiding contentious disputes over fair value. 3. Authority and Apparent Authority in Winding Up: o In the Paciaroni v. Crane case, the court considered whether the partnership's business (racing a valuable racehorse) could continue during winding up to maximize value. The court ruled that if continuing the business is in good faith and enhances the asset’s value (in this case, Black Ace), it is permissible even after dissolution. The case underlines that winding-up partners should have clear authority in the agreement regarding asset management and liquidation. 4. Protecting the Partnership’s Interests: o To avoid unwanted dissociation and disruption, agreements should outline clear steps for notice and dispute resolution when disagreements arise. Additionally, an agreement may specify whether any partner can independently initiate winding up or if a supermajority vote is required, thus ensuring continuity unless consensus dictates otherwise. Suggested Clauses for a Partnership Agreement:  Termination Without Cause: Include explicit language indicating if partners can be terminated without cause, along with a specific buyout   formula or process to avoid disputes over the value of a departing partner’s share. Winding Up and Authority: Outline the powers of winding-up partners, detailing any limitations on borrowing, asset management, and authority to engage in ongoing business activities that might increase liquidation value. Notification and Authority Restrictions: Require the partnership to notify clients, creditors, and stakeholders in cases of dissolution to prevent partners from inadvertently binding the partnership to new obligations. By addressing these points in a partnership agreement, a partnership can minimize disputes, ensure clarity in handling partner exits, and protect against unintended operational disruptions.