A Minnesota LLC bought out one of its founding owners and paid most of the price over time under a promissory note. The founder stayed on as an employee during a transition. The buyout’s separation agreement cut the price by a set percentage if the company ended that employment for cause. More than a year later, the founder’s conduct toward employees and outside business contacts had deteriorated. The remaining owners asked me whether they could terminate for cause under the buyout terms.

Where Does “Cause” Come From if the Buyout Papers Don’t Define It?

The separation agreement used the word “cause” without defining it. But it kept the founder’s older employment agreement in force, and that agreement’s grounds for cause included conduct that, in the managers’ reasonable judgment, will harm the company’s reputation or business. The company’s position was that, read together, the two agreements gave the undefined word a definition the founder had signed.

What Should a For-Cause Termination Letter Contain?

The employment agreement required a vote of the managers for a for-cause termination, so the owners recorded that vote in writing. I drafted a termination letter that:

  • stated the grounds, quoting the founder’s own messages;
  • gave notice of the price reduction;
  • restated the confidentiality and nonsolicitation obligations that continue after the job ends; and
  • set a date for the return of company property.

The company sent it the same day.

What Happened?

Weeks later, the owners reported that things had been quiet since the termination.

What Can an Owner Buying Out a Partner Take From This?

  • Define “cause” in the buyout papers themselves. When a selling owner stays on as an employee, it helps for those papers to say which ways of ending the job change the price. A resignation and a termination for cause can lead to very different numbers.
  • Follow your own procedure. When a price term depends on who ends the relationship, the company’s own procedure, such as a written managers’ vote, and prompt notice help protect that term.

My guides on why termination-for-cause clauses fail in litigation, how to buy out a partner, shareholder buyout agreements, and the risks of seller financing cover the rules behind this story. More on buyouts and sales is on my business sales page.

Identifying details are omitted to protect client confidentiality. Past results do not predict future results; every matter turns on its own facts and law.