There are two important consequences of general partnership dissociation that must be kept in mind when a partner considers dissociation:
Consequence One: Dissociating partners immediately upon dissociation are free to compete with their former partnership. Their duty of loyalty not to compete with the partnership ends. See law below.
Consequence Two: Dissociating partners immediately upon dissociation have no right to participate in the management or conduct of the partnership’s business or participate in the winding up of the partnership’s business on dissolution. See law below.
It Pays to Know the Law
Consequences of general partnership dissociation are clearly set forth in the California Corporations Code.
Section 16603 provides:
“Upon a partner’s dissociation, all of the following apply:
(1) The partner’s right to participate in the management and conduct of the partnership business terminates.
(2) The partner’s duty of loyalty under paragraph (3) of subdivision (b) of Section 16404 terminates.
(3) The partner’s duty of loyalty under paragraphs (1) and (2) of subdivision (b) of Section 16404 and duty of care under subdivision (c) of Section 16404 continue only with regard to matters arising and events occurring before the partner’s dissociation.”
Section 16404 provides in part:
“(a) The fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subdivisions (b) and (c).
(b) A partner’s duty of loyalty to the partnership and the other partners includes all of the following:
(1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.
(2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership.
(3) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
(c) A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
(d) A partner shall discharge the duties to the partnership and the other partners under this chapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.….”
Corp. Code, § 16404 (bolded font emphasis supplied)
The need (desire) to set up a competing business and move on with life vs. the desire to participate in the winding up of the former partnership’s business are indeed powerful and under the law of competing interests.
But There Is a Choice to Be Made
After considering the consequences of general partnership dissociation carefully, you’ll need to make a choice.
Choice One: Dissociate and move on with forming and operating a business that competes with the dissociating partner’s prior partnership’s business, and do not participate in the conduct of the business of the former business nor the winding up of that former business, or
Choice Two: Do not dissociate, and (a) reach a new agreement with former partners or (b) participate with former partners in dissolving and winding up of the partnership.
Once again, the Yin and Yang of life is inescapable. It pays to carefully consider the consequences of general partnership dissociation.
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