Partner separation - BMBY in a partnership contract

The conflict between business partners happens often and sometimes results in the closing of joint businesses. This raises many legal problems and questions regarding the division of assets the business shares. Is it possible to simplify the complex process of business partner separation? In this article, an attorney specializing in Israeli corporate law will explain a legal mechanism that may enable this, and it is recommended to consider using it in agreements between partners who share a business.

Our law offices in Jerusalem and Tel Aviv specialize in Israeli corporate law. The firm advises various companies and offers various legal services, including legal representation in claims between business partners, in courts, and mediation or arbitration proceedings.

How do you make a business breakup simpler?

“All farewells are sad,” in the words of Shlomo Artzi’s famous “Farewell Song.” This is also true in cases of business partners. Separation between partners can happen for various reasons, such as professional disagreements, better opportunities for one of the partners, or a crisis at the company. For the most part, the circumstances are not happy since, upon setting out, things look entirely different. Otherwise, likely, the partners would not have entered the joint path in the first place.

Is there a way to make a separation simpler and more feasible despite the emotions involved? One of the best ways to do this is to connect a contractual mechanism called BMBY. This legal mechanism was developed in American law, informally known as the Shotgun Clause. The mechanism is called BMBY, which stands for “Buy Me, Buy You”. It is usually included in agreements between business partners at the outset and used extensively in various commercial agreements, such as shareholders’ agreements. It is sometimes customary to include it in entrepreneurs’ agreements in start-ups.

How does the mechanism work?

According to the mechanism, partners have the same right to offer a price to purchase the other partner’s share in the business. The first to offer will actually determine the price of the purchase transaction. From that moment, the ball passes to the other partner, who will be subject to this price. On the other hand, the other partner will have the choice of agreeing to the purchase or purchasing the first partner’s share himself. This mechanism will incentivize the first partner to offer a price that is not lower than what he was willing to accept.

Cases in which the mechanism does not necessarily achieve the desired result:

According tot he law in Israel it is essential to know when it is appropriate to include the mechanism in an agreement between partners since, in some cases, it will not necessarily resolve the disputes between the parties. For example, if there are power gaps between the partners, various problems may arise. For example, when one partner is in a much better financial position than the other partners, he may offer a lower price than he would like to receive. This will result in the mechanism losing effectiveness. Interestingly, in the case of a legal dispute between the controlling shareholders of the former IDB Group, separation was demanded through the BMBY mechanism, but this was rejected because the mechanism was not included in the agreement between the controlling shareholders.

Moreover, even if the mechanism exists, operating it is not always correct, depending on each case’s specific circumstances. The mechanism facilitates a final and complete separation between the partners. On the other hand, there are cases in which disputes can be resolved through alternative ways, such as mediation, which sometimes results in the partnership continuing.

In this article, we briefly explained the BMBY mechanism, which may facilitate the separation of partners in the company. If you have any further questions on the subject, please contact us. In our law firm, you will find lawyers with extensive expertise, experience, and knowledge in corporate law and in providing advice to business partners and officers of companies.