The modern claim for intentional interference with business or contractual relations was unified by the Alabama Supreme Court in 1986. This unified tort provides a comprehensive remedy for improper interference with both existing fixed-term contracts and reasonable expectancies of commercial relations.

Elements of the Claim

To successfully prove a claim of tortious interference in Alabama, a plaintiff must establish five specific elements:

1. The existence of a protectable business relationship or contract.
2. The defendant’s knowledge of that relationship.
3. The defendant was a “stranger” (third party) to the relationship.
4. The defendant intentionally interfered with the relationship.
5. Resulting damage to the plaintiff caused by the interference.

Notably, a plaintiff does not need to show “fraud, force, or coercion” to prove the claim. You must, however, prove that the defendant acted intentionally rather than negligently.

Types of Protected Business Relations

The claim applies to a broad range of business dealings. This includes contracts with outside parties, employee contracts, and prospective business relations with clients and customers.

• Writing Requirements: A business relationship does not strictly have to be in writing to bring a claim. Alabama law protects anticipated commercial relations even without a formal, binding contract. However, if the interference claim relies on an underlying contract that is legally void, such as an oral agreement for the sale of land that violates the Statute of Frauds, the tortious interference claim will fail.
• Property Sales: Interference claims apply to property sales, including late-stage negotiations for commercial real estate.
• Employees and Clients: The law protects employers from rivals who systematically encourage employees to resign (poaching or raiding). It also protects relationships with existing and prospective customers. However, a business does not have a protectable relationship with every potential customer in a local market.

Free Competition vs. Tortious Interference

Alabama places a high value on free market competition. The line between free competition and tortious interference in Alabama is defined by the “competitor’s privilege” or “bona fide business competition justification.”

Under Alabama law, furthering your own legitimate business interests is considered a sufficient justification for interfering with a competitor’s advantage. Competing for business, even if it ruins a rival, is not actionable as long as it is done to advance one’s own interest and without wrongful means.

However, this privilege does not allow competitors to act unlawfully. If a competitor uses “wrongful means,” such as fraud, misrepresentation, physical violence, libel, slander, or baseless civil and criminal threats, the interference becomes tortious.

Available Damages and Remedies

A successful plaintiff in an interference claim can recover comprehensive damages, which may include:

• Pecuniary loss of the benefits of the contract or relation.
• Consequential losses proximately caused by the interference.
• Mental anguish and emotional distress, if reasonably expected to result.
• Actual harm to reputation.
• Punitive damages, if there is clear and convincing evidence of malice or spite.

In addition to monetary damages, courts may issue temporary or permanent injunctions to halt further breaches or prevent damage from ongoing competitive activity.

(Note: While specific performance is a common remedy in real estate disputes, it is a remedy for a breach of contract to force a party to fulfill their obligations, rather than a tort claim against the third party who caused the breach.)

Common Defenses

Defendants facing an interference claim have several available defenses:

• The “Stranger” Doctrine: A defendant cannot be liable if they are a party to the contract or an essential participant in an interwoven business relationship. The defendant must be a true third party.
• Justification: A defendant can argue their actions were a bona fide business competition.
• Honest Advice Justification: Liability can be avoided if the defendant establishes that their advice was requested, was within the scope of the request, and was honest.

Schedule a Consultation

Business disputes involving disrupted contracts and lost customers are legally complex. If you have questions about tortious interference in Alabama, or if your business is facing a dispute regarding unfair competition, professional legal guidance is highly recommended. Contact our office today to schedule a consultation and discuss your legal options.

The agent has the specific authority to establish legal and contractual relations with third parties on the principal’s behalf. This relationship is fundamentally built on trust, making the agent a fiduciary. As a fiduciary, the agent owes a strict duty of loyalty, must act primarily for the principal’s benefit, and is strictly prohibited from acquiring a material or secret benefit in connection with a transaction undertaken for the principal.

Forming an Agency Relationship

Under Alabama agency law, an agency relationship is determined by the actual facts and circumstances of the case rather than how the parties characterize their relationship. An agency can be formed through:

• Express Agency: Created by an oral or written agreement.
• Implied Agency: Proved by deductions or inferences from facts and circumstances.
• Apparent Authority or Estoppel: Occurs when a principal’s actions cause a third party to reasonably believe an agency exists.

An agent can be an individual or a business entity. There is no legal limit to the number of agents a principal can have. Agents can be unpaid, or they can receive compensation through salaries, hourly fees, retainers, or commissions.

An agency does not inherently require a written contract. However, exceptions exist. If an agent is entering into a contract on behalf of a principal that falls within the Statute of Frauds (such as a contract for the sale of real estate), Alabama law requires that the agent’s authorization to enter that contract must also be in writing.

Agents Versus Employees

While both employees and agents are subject to the control of the employer or principal, the distinction lies in the scope of their roles and the degree of control. An employee generally performs tasks at the employer’s specific direction, and the employer controls the specific details of how the work is accomplished. Therefore, a master-servant (employer-employee) relationship is a specific subcategory of a principal-agent relationship. All employees are agents, but not all agents are employees. It is also common for individuals to hold dual roles; corporate officers, for example, are both employees and agents authorized to bind the corporation in business dealings.

Understanding an Agent’s Authority

An agent’s ability to bind a principal depends on their authority. Alabama agency law categorizes authority into the following types:

• Express Authority: Derived from explicit written or oral instructions, corporate bylaws, or board resolutions.
• Implied Authority: Derived from what is customary for the position the agent holds.
• Apparent Authority: Arises when the principal’s actions or omissions cause a third party to reasonably believe the agent possesses the authority to bind the principal.
• Inherent Authority: Stems from the responsibilities with which the agent is invested.

There are also general agents, who have broad authority to carry out usual business, and special agents, whose authority is strictly limited to specific services.

If an agent exceeds the scope of their authority, the principal is generally not bound by the act. The principal may choose to ratify the unauthorized act later, which retroactively binds the principal. If the principal refuses to ratify the action, the agent can be held personally liable to the third party.

Liability: Contract vs. Tort Cases

The distinction between tort and contract cases dictates liability for both the principal and the agent.

• Contract Cases: Liability depends strictly on authority. If an agent acts within their authority for a disclosed principal, the principal is bound by the contract, and the agent does not incur personal liability. If the agent lacks authority, or fails to disclose the principal’s identity, the agent may be held personally liable. A business can still be sued for an unauthorized contract if the business’s own conduct created apparent authority.
• Tort Cases: Liability for torts (such as negligence or fraud) is governed by the doctrine of respondeat superior. A principal is vicariously liable for an agent’s torts if the wrongful acts were committed within the “line and scope” of the agent’s employment or in furtherance of the principal’s business. This applies even if the employer never authorized or actively forbade the wrongful conduct. Furthermore, an agent remains personally liable for any torts in which they personally participate, regardless of their agency status.

Powers of Attorney and Fiduciary Obligations

The execution of a power of attorney creates a principal-agent relationship. Because of the fiduciary nature of the relationship, a principal is entitled to an equitable accounting of the agent’s actions taken on their behalf.

In Alabama, a minor is legally permitted to act as an agent under an executed power of attorney. Furthermore, under the Alabama Revised Uniform Fiduciary Access to Digital Assets Act, an agent granted powers under a power of attorney is classified as a fiduciary. If expressly granted by the power of attorney, this agent may request and receive disclosure of the principal’s digital assets and the content of electronic communications.

Schedule a Consultation

Navigating Alabama agency law requires a clear understanding of legal obligations, authority limits, and liability risks. Misclassifying an employee, exceeding operational authority, or failing to properly document a principal-agent relationship can result in significant legal and financial consequences. Contact my office today to schedule a consultation so we can ensure your business operations, contracts, and agency agreements are legally sound and properly structured.

This post outlines the mechanics of these claims, the differences between entities, and how business owners can protect their personal assets.

Understanding Piercing

Piercing the corporate veil is an equitable remedy of last resort. It is not an independent cause of action; rather, it is a mechanism used to extend liability to a second party for an underlying claim (such as breach of contract or a tort) against the primary corporate defendant.

Courts view this remedy as an extreme exception. Litigating these claims requires extensive discovery into bank records, tax returns, and corporate governance documents. If a business possesses adequate capital, liquid assets, or commercial insurance to fully satisfy a claim, courts generally will not bypass the corporate structure, as there is no inequitable result necessitating the remedy.

Furthermore, piercing the veil is transaction-specific. Disregarding the corporate entity for one specific transaction or bad-acting shareholder does not permanently invalidate the corporation’s legal existence, nor does it automatically impose liability on remaining innocent shareholders.

How These Claims Work

When prosecuting a claim for piercing the corporate veil in Alabama, a plaintiff generally must prove a two-prong test:

1. Unity of Interest and Ownership: The plaintiff must prove the entity is merely an “alter ego” or “instrumentality” of the owner, meaning they have no separate existence. Plaintiffs prove this by exposing red flags such as the commingling of personal and business funds, severe undercapitalization, the unauthorized diversion of corporate assets for personal use, or a complete failure to observe corporate formalities.
2. Fraud or Inequitable Result: The plaintiff must demonstrate that adhering to the separate corporate entity would sanction a fraud, promote injustice, or result in an inequitable consequence. There must be a clear causal connection between the owner’s misuse of the corporate form and the plaintiff’s injury. Simple insolvency or poor business management is insufficient.

Defending a Claim: Defending against a veil-piercing claim involves proving the business is a legitimate, separate legal entity. Defendants achieve this by:

• Producing corporate records (meeting minutes, resolutions) to prove formalities were followed.
• Showing that personal expenses were properly accounted for (e.g., treated as income or loans).
• Demonstrating the business was adequately capitalized for its risks and carried commercially reasonable insurance.

Timing and Pre-Suit Investigation

You can pursue these claims either before or after a judgment. Plaintiffs can plead veil-piercing claims in their initial complaint. Alternatively, you can pursue it post-judgment. For example, in the Alabama case Ramko, Inc. v. Lander, a plaintiff who had already achieved a civil judgment against a corporation subsequently filed an independent action to pierce the veil and collect the judgment against the underlying sole shareholder.

Before filing a lawsuit, plaintiffs can investigate potential red flags through public records:

• Secretary of State Records: Check for administrative dissolutions, shared assumed names, identical ownership of multiple entities, or sudden ownership changes.
• UCC and Property Records: Search for recently recorded liens or corporate assets transferred to insiders below market value.
• Court Records: Identify if the owner operates shell entities or has a history of transferring assets during pending lawsuits.

Differences Among Corporate Entities

Courts apply the same general principles to LLCs as they do to traditional corporations, but they weigh the factors differently:

• Formalities: LLC statutes require fewer structural formalities (e.g., no board of directors or formal annual meetings required). Therefore, courts place less emphasis on the failure to observe formalities when assessing an LLC.
• Distributions: In an LLC, informal distributions to members are legally permitted by the operating agreement, making it harder to claim funds were improperly siphoned unless the distribution rendered the LLC insolvent.
• Single-Member LLCs (SMLLCs): SMLLCs face higher scrutiny because the lines between personal and business actions are easily blurred for a single owner.
• Unincorporated Entities: The doctrine does not apply to general partnerships or sole proprietorships because these entities do not have a liability shield. In a general partnership, all partners are already jointly and severally liable by default.

Advanced Concepts

Reverse Veil Piercing: This allows a creditor to seize the business entity’s assets to satisfy the owner’s personal debts. “Outsider” reverse piercing occurs when a third party (like a divorcing spouse or personal creditor) seeks assets hidden inside the company. “Insider” reverse piercing occurs when the business owner asks the court to disregard the entity they created (e.g., to claim a homestead exemption). Courts usually reject insider claims and apply reverse piercing cautiously to avoid harming innocent co-owners or business creditors.

Enterprise Liability (Horizontal Piercing): Courts can apply the “Single Enterprise Doctrine” to pierce horizontally between two sister companies if they are operated as a single enterprise with commingled funds.

Parent-Subsidiary Piercing: A parent corporation can be held liable for its subsidiary’s debts if the parent exercises total control, making the subsidiary merely a facade. Stock ownership or shared directors alone is insufficient.

A Unique State Rule: Creditors Cannot Be Owners

A highly specific rule regarding piercing the corporate veil in Alabama is that an outside creditor cannot be treated as an underlying owner. Regardless of how much influence or control a creditor exercises over a debtor corporation’s affairs, Alabama law holds that they cannot be held liable under a veil-piercing theory.

How Business Owners Can Protect Themselves

Business owners and innocent partners can insulate themselves from piercing the corporate veil in Alabama by strictly respecting the boundary between themselves and the entity:

• Never commingle funds: Maintain entirely separate bank accounts and credit cards. Never use corporate funds to pay personal expenses or deposit business checks into a personal account.
• Observe corporate formalities: Hold regular meetings, keep accurate minutes, and file required annual reports with the Secretary of State.
• Ensure adequate capitalization and insurance: Fund the business sufficiently to cover reasonably anticipated liabilities and maintain adequate commercial insurance.
• Document all insider transactions: Document owner loans to the business with formal promissory notes on arm’s-length terms.
• Hold the business out correctly: Always use the proper corporate designation (“LLC” or “Inc.”) on contracts, letterhead, and signage.

Conclusion

Navigating a veil-piercing claim requires careful legal strategy, whether you are a creditor seeking to recover a debt or a business owner protecting your personal assets. If you are dealing with a corporate liability issue in Alabama and need guidance, contact our office today to schedule a consultation and discuss the specifics of your case.

Disclaimer: This post is for informational purposes only and does not constitute legal advice. Each case is fact-specific. If you are wanting to analyze your case, please contact our office to discuss your specific situation.

A breach of fiduciary duty in Alabama arises when directors, officers, managers, or partners violate their obligations. This violation often results in financial harm to the business entity or to individual minority owners. This guide provides a straightforward overview of fiduciary duties, how they apply to different business structures, and the legal remedies available when these duties are violated.

What Are Fiduciary Duties?

Fiduciary duties represent the highest standard of care imposed by law. They require individuals in positions of trust to act loyally, in good faith, and for the benefit of the business and its owners. These legal obligations prohibit fiduciaries from using their position to gain an improper personal advantage, competing with the business, or acting with gross negligence.

Who Owes Fiduciary Duties in Alabama?

Individuals owe fiduciary duties when they are entrusted with the management and control of a business. This applies across various business entities:

• General Partnerships: Partners owe each other strict duties of loyalty, care, and utmost good faith. They must fully disclose material facts, account for any profit, avoid self-dealing, and not compete with the partnership.
• Corporations: Directors and officers owe the corporation the duty of care and loyalty. In closely held corporations, majority shareholders owe a heightened duty of fairness to minority shareholders.
• Limited Liability Companies (LLCs): Duties depend heavily on how the LLC is managed and the specific terms of the Operating Agreement. In a manager-managed LLC, the managers owe the duties of loyalty and care. In a member-managed LLC, all members owe duties of loyalty and care. Notably, Alabama law allows LLC members to use their Operating Agreement to legally expand, restrict, or entirely eliminate the duties of care and loyalty, provided they do not eliminate the implied covenant of good faith and fair dealing.

If two or more people carry on a business for profit without formally filing paperwork with the state, Alabama law automatically defaults the business to a General Partnership. In this scenario, all partners owe strict, inescapable fiduciary duties to one another, and all partners are personally liable for the debts of the business.

Core Fiduciary Duties

Litigation regarding a breach of fiduciary duty in Alabama generally focuses on three main categories:

1. The Duty of Loyalty: This requires absolute fidelity to the business. Fiduciaries must avoid conflicts of interest, refrain from self-dealing, avoid competing with the business, and hold in trust any property or profit derived from their position. A typical breach is usurping a corporate opportunity, which occurs when a director diverts a lucrative contract away from the company to a separate business they own.
2. The Duty of Care: This dictates that fiduciaries must act in good faith and exercise the care an ordinarily prudent person would use under similar circumstances. The duty of care is breached by engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
3. The Implied Covenant of Good Faith and Fair Dealing: This is a statutory and contractual requirement mandating honest and fair conduct among business owners and managers.

The Litigation Process and Causes of Action

When pursuing a claim for a breach of fiduciary duty in Alabama, the first procedural step is determining who suffered the harm.

Derivative Actions If the harm was suffered by the business entity itself, an individual owner cannot simply sue for their proportionate loss. Examples of this include an officer embezzling company funds or wasting corporate assets. Instead, the owner must file a derivative action. This means acting on behalf of the company to sue the wrongdoers for the benefit of the business. Derivative actions have strict procedural hurdles. The most notable requirement is making a formal demand on the board of directors to fix the problem before filing suit, unless proving such a demand would be utterly futile due to a lack of independence.

Direct Actions If the harm is distinctly personal to the owner, the plaintiff can bring a direct action in their own name. A common example is a minority shareholder being maliciously locked out of the company and denied dividends. This is known legally as a freeze-out or squeeze-out claim.

Specific underlying causes of action in these lawsuits often include fraudulent misrepresentation, minority shareholder oppression, negligence, conversion, or civil conspiracy.

Evidence and Damages

To prove a breach of fiduciary duty in Alabama, plaintiffs generally bear the burden of proving the breach by a preponderance of the evidence. However, if a fiduciary is accused of a conflict of interest transaction that was not pre-approved after full disclosure, the burden of proof shifts to the defendant to prove the transaction was entirely fair to the corporation.

Typical Evidence for the Plaintiff:

• Corporate financial records, tax returns, and bank statements showing commingled funds, excessive salaries, or unauthorized distributions.
• Corporate minutes showing a lack of formalities or unapproved transactions.
• Emails or communications demonstrating malicious intent, competitive ventures, or diverted contracts.

Typical Evidence for the Defendant:

• Signed operating agreements or bylaws containing exculpatory clauses or duty waivers.
• Board meeting minutes proving full disclosure and approval of a transaction by disinterested parties.
• Financial reports or legal opinions prepared by experts that the director reasonably relied upon.

Potential Remedies and Damages: Courts may award severe remedies for a successful claim, including:

• Compensatory damages for actual financial losses suffered by the business or individual.
• Restitution or disgorgement, forcing the wrongdoer to surrender illicit profits or excessive compensation.
• Equitable remedies, such as court-ordered injunctions or the imposition of a constructive trust to capture future profits from a stolen business opportunity.
• Punitive damages if the breach involved willful, malicious, or reckless misconduct.

Common Defenses

Defendants in these cases often rely on specific legal defenses:

• The Business Judgment Rule: This legal presumption protects managers and directors from liability if their decisions were made in good faith, with due care, and in the best interest of the company, even if the decision lost money.
• Waiver or Exculpation: In LLCs, operating agreements can legally restrict or eliminate certain duties, limiting liability to only bad faith or knowing violations of the law.
• Ratification: A conflict of interest transaction is not voidable if the fiduciary fully disclosed their interest and the transaction was approved by a majority of disinterested directors or members.
• Statute of Limitations: In Alabama, claims based on torts, fraud, or breach of fiduciary duty generally must be brought within two years of the wrongful act or its discovery.

Heightened Duties in Closely Held Corporations

Small business owners must be particularly careful. Many owners hold multiple roles, such as majority owner, sole director, and CEO, which can lead to informal practices. In closely held corporations (small businesses with few owners and no public market for shares), majority shareholders owe a heightened duty to minority shareholders.

The majority cannot fall back on standard arm’s length rules to justify their actions. They are legally prohibited from using their control to oppress or unfairly deprive minority owners of their reasonable expectations, such as employment, dividends, or participation in the business. Furthermore, if an owner commingles personal and business funds or treats the corporate accounts as a personal fund, a court may pierce the corporate veil. This renders the owner personally liable for the company’s debts.

Schedule a Consultation

Navigating a breach of fiduciary duty in Alabama requires experienced legal counsel. Whether you are a minority owner whose rights have been violated or a business manager facing allegations of misconduct, prompt action is critical. Contact our office today to schedule a consultation and discuss your legal options.

Disclaimer: This post is for informational purposes only and does not constitute legal advice. Each case is fact-specific. If you are wanting to analyze your case, please contact our office to discuss your specific situation.

As an Alabama attorney, I frequently advise business owners on how to navigate these splits. The rules for a Corporation, a Limited Liability Company (LLC), or a General Partnership differ significantly under Alabama law (Title 10A).

This article is a guide to how different business entities handle dissolution, dissociation, and the winding-up process.

1. Corporations (C-Corps and S-Corps)

For corporations, ending the business is a two-step process: dissolution (terminating the corporate existence) and liquidation (the financial winding up).

Voluntary Dissolution Most corporate splits are voluntary. If the corporation hasn’t issued shares or started business yet, a majority of the initial directors or incorporators can file for dissolution. For active businesses, the process usually begins with the Board of Directors proposing dissolution, followed by shareholder approval. Alternatively, if all shareholders agree in writing, the corporation can be dissolved without a board meeting.

Involuntary and Judicial Dissolution When shareholders are fighting, the courts may get involved. A circuit court in Alabama can dissolve a corporation if:

• Deadlock: Directors are deadlocked, causing irreparable injury to the corporation.
• Shareholder Deadlock: Shareholders have been unable to elect directors for two consecutive annual meetings.
• Misconduct: Those in control are acting illegally, oppressively, or fraudulently.
• Waste: Corporate assets are being misapplied or wasted.

2. Limited Liability Companies (LLCs)

LLCs are the most flexible entities, but that flexibility requires careful attention to the Alabama Limited Liability Company Law.

When does an LLC dissolve? An Alabama LLC generally dissolves upon:

• Written consent of all members.
• An event specified in the LLC operating agreement.
• The departure of the last remaining member (unless there is an agreement to appoint new members within 90 days).

Judicial Intervention If members cannot agree on a path forward, a court may order dissolution if it determines that it is “not reasonably practicable” to carry on the LLC’s activities in conformity with the LLC agreement.

The “Buyout” Trap It is critical to note a major change in Alabama law regarding LLCs. Since 1998, the statutory “default rule” mandating buyouts for withdrawing members was removed. This means if your Operating Agreement does not explicitly state how a member is bought out, you may have to rely on judicial remedies to exit the company with the value of your shares intact.

3. Partnerships (General and Limited)

Alabama Partnership Law (Title 10A, Chapter 8A) introduces a vital distinction between Dissociation and Dissolution.

• Dissociation: When a partner leaves (withdraws, dies, or goes bankrupt), they are “dissociated.” This does not necessarily kill the business.
• Dissolution: This is the point where the partners stop normal business operations and begin winding up.

The Default Buyout Rule Unlike LLCs, Alabama partnership law does provide a statutory safety net. If a partner dissociates without causing a full dissolution, the partnership is generally mandated to purchase that partner’s interest for a “fair value” buyout price.

Limiting Liability For General Partnerships, filing a Statement of Dissolution is a crucial step. Ninety days after this statement is filed, third parties are deemed to have notice of the dissolution. This cuts off the authority of unauthorized partners to bind the firm to new debts during the winding-up phase.

Special Considerations for Closely Held Corporations

While the general rules of corporate dissolution apply to all corporations, “closely held” corporations—those with a small number of shareholders and no public market for their shares—face unique challenges. In Alabama, the law recognizes that these entities often operate more like partnerships than large public companies. Consequently, there are specific statutory provisions and judicial remedies designed to protect minority shareholders and resolve deadlocks. These are especially important when Alabama businesses split.

1. The Two Types of Closely Held Corporations Alabama law distinguishes between closely held corporations based on when they were formed.

• Statutory Close Corporations (Pre-1995): Corporations formed before January 1, 1995, could elect “Statutory Close Corporation” status. If this status hasn’t been terminated, these entities operate under older special rules (Ala. Code §§ 10A-30-2.01 et seq.) which can include powerful options, such as a shareholder’s unilateral right to dissolve the company at will—similar to a partner withdrawing from a partnership—provided this right is stated in the articles and on share certificates.
• Modern Closely Held Corporations (Post-1994): For corporations formed after 1994, the “Statutory Close Corporation” election no longer exists. Instead, these corporations achieve flexibility through the Alabama Business Corporation Law. They rely heavily on Shareholders’ Agreements to create partnership-like governance.

2. The Power of the Shareholders’ Agreement For modern closely held corporations, the Shareholders’ Agreement is the most critical document for handling a split. Under Ala. Code § 10A-2A-7.32, these agreements can override standard corporate rules to tailor how a breakup happens. A well-drafted agreement can:

• Mandate Dissolution: Require the corporation to dissolve upon a specific event or the request of a specific shareholder.
• Resolve Deadlock: Establish a tie-breaking mechanism (such as a third-party arbitrator) to resolve director or shareholder deadlock without going to court.
• Shift Management: Transfer authority from the Board of Directors to the shareholders, effectively allowing the business to run exactly like a partnership.

3. Judicial Dissolution and “Oppression” When there is no agreement and the parties are fighting, a shareholder can petition the Circuit Court for dissolution. In the context of a closely held corporation, the grounds for this often include:

• Deadlock: Directors are divided, and shareholders cannot break the tie, causing injury to the business.
• Oppression or Fraud: The majority shareholders are acting in a manner that is illegal, fraudulent, or “oppressive” to the minority.
• Shareholder Deadlock: Shareholders have failed to elect directors for two consecutive annual meetings.

4. The “Buyout” Option: An Alternative to Dissolution Filing a lawsuit to dissolve a company is often used as leverage. However, Alabama law provides a specific “escape hatch” for the corporation and non-petitioning shareholders to stop the dissolution.

• Election to Purchase: Within 90 days of a shareholder filing a petition for judicial dissolution, the corporation (or other shareholders) may elect to purchase the petitioner’s shares at their “fair value.”
• Irrevocable: Once this election is made, it cannot be taken back.
• Fair Value Standard: If the parties cannot agree on a price, the court will determine the “fair value.” Crucially, Alabama courts generally reject the use of “marketability discounts” (discounts applied because the shares are hard to sell). This prevents majority shareholders from “squeezing out” a minority partner at an unfairly low price.

5. Fiduciary Duties in the Close Corporation Because shareholders in a closely held corporation cannot easily sell their shares on a public market, Alabama courts hold majority shareholders to a higher fiduciary standard, similar to the duties partners owe one another. Actions that harm the minority’s reasonable expectations—such as paying excessive salaries to family members while refusing to pay dividends—can be deemed a breach of this duty, leading to court-ordered remedies.

The Critical Role of Governing Documents

The controlling document for a business split in Alabama is your governing document—Bylaws for corporations, Operating Agreements for LLCs, and Partnership Agreements for partners.

When these documents are drafted correctly, they dictate exactly how a split occurs, including:

• Buy-Sell Agreements: Defining the terms and price for buying out an owner.
• Dispute Resolution: How to handle deadlock without going to court.

What happens if we don’t have documents? If you lack a written agreement, statutory default rules apply.

• Partnerships: Partners have equal management rights and share profits/losses equally, regardless of capital contribution.
• LLCs: The implied contractual covenant of “good faith and fair dealing” applies and cannot be eliminated.
• Corporations: You are bound by rigid statutory procedures for meetings and voting.

The Final Step: Winding Up

Regardless of the entity type, you cannot simply lock the doors and walk away. “Winding up”, or where businesses in Alabama formally split, is a mandatory legal phase where the entity must:

1. Collect assets.
2. Discharge or make provision for liabilities.
3. Distribute remaining assets to owners.

Alabama statutes provide strict procedures for handling claims. For example, entities can bar unknown claims by publishing a notice of dissolution in a newspaper. If a claimant does not commence a proceeding within two years of that publication, the claim is generally barred. Failing to follow these notice procedures can leave you personally exposed to “ghost” liabilities years down the road.

Conclusion

Alabama business splits requires more than just shaking hands and parting ways. It requires strict adherence to statutory notice periods, a clear understanding of your fiduciary duties during the winding-up phase, and a strategy for valuing ownership interests.

Whether you are drafting a partnership agreement to prevent future headaches or are currently in the middle of a business dispute, professional legal counsel is essential to protect your assets. Call or schedule a consultation today to discuss with Will. You can also refer to my Business page for more information.

Disclaimer: This article provides a general overview of Alabama property law and does not constitute legal advice or create an attorney-client relationship. You should consult an attorney regarding your specific legal situation.

If you are an employer drafting a contract, or an employee being asked to sign one, a common question arises: Are non-compete agreements actually enforceable in Alabama?

The short answer is yes, but with significant caveats. Alabama law is unique in its approach to restrictive covenants. Below, we break down the statutory framework, the specific requirements for enforceability, and the common pitfalls that can render an agreement void.

The General Rule: Presumption of Voidness

Unlike some states where non-competes are viewed neutrally, Alabama law starts with a skeptical eye. Under Ala. Code § 8-1-190(a), the general rule is that every contract restraining someone from exercising a lawful profession, trade, or business is void.

The reasoning behind this is public policy: the law discourages contracts that deprive the public of efficient service or impoverish the individual being restrained.

However, Ala. Code § 8-1-190(b) provides specific statutory exceptions. If an agreement falls into one of these exceptions—and meets specific criteria—it can be enforced.

The Four Core Requirements for Enforceability

For a non-compete agreement to hold up in an Alabama court, the employer generally holds the burden of proof. The agreement must meet four distinct conditions:

1. The employer must have a protectable interest.
2. The restriction must be reasonably related to that interest.
3. The restriction must be reasonable in time and place.
4. The restriction must not impose an undue hardship on the employee.

1. What Qualifies as a “Protectable Interest”?

You cannot restrict an employee simply to prevent competition. You must prove you are protecting a specific asset. Ala. Code § 8-1-191(a) explicitly defines protectable interests as including:

• Trade secrets and confidential information.
• Commercial relationships with specific existing customers, clients, vendors, or patients.
• Goodwill associated with an ongoing business or franchise.
• Specialized training: This refers to training involving substantial expense specifically directed to the employee (and must be set forth in writing).

Note: Simple job skills, even if acquired on the job, are not a protectable interest.

2. Reasonableness of Time

How long can a non-compete last? Alabama law provides “presumptions of reasonableness” regarding duration:

• Employee Non-Competes: Restraints of two years or less are presumed reasonable.
• Sale of a Business: Restraints of one year or less are presumed reasonable.
• Non-Solicitation of Customers: Restraints of 18 months (or as long as post-separation consideration is paid) are presumed reasonable.

Lengthy durations outside these norms generally render an agreement unenforceable.

3. Reasonableness of Place (Geography)

A non-compete cannot cover the entire world. The geographic scope must be limited to the territory where the employee was active and where the employer carries on a “like business.”

For example, a clause forbidding an employee from competing globally was found unenforceable by the Alabama Supreme Court in Westwind Techs., Inc. v. Jones. To be enforceable, the map must match the actual business footprint.

4. The “Professional” Exemption (Undue Hardship)

This is a critical distinction in Alabama law. Non-compete agreements are generally unenforceable against professionals. Courts have determined that restricting these individuals imposes an undue hardship on them and prejudices the public interest.

This exemption has been specifically extended to:

• Attorneys
• Physicians
• Certified Public Accountants (CPAs)
• Veterinarians
• Physical Therapists

The Importance of Timing and Consideration

A valid contract requires “consideration” (something of value exchanged for the promise).

• Continued Employment: In Alabama, continued employment is sufficient consideration, even if the employee is “at-will.”
• The Timing Trap: The employment relationship must exist at the time the agreement is signed. Agreements entered into before the start of the employment relationship (e.g., weeks before the first day of work) have been deemed void at their inception (Pitney Bowes, Inc. v. Berney Office Solutions).

The “Blue Pencil” Rule

What happens if a non-compete is slightly too broad? Alabama follows the “Blue Pencil” rule. This grants a judge the discretion to reform (rewrite) the contract to make it reasonable regarding time or territory, rather than throwing the whole contract out.

However, if the restraint does not fall within a statutory exception at all, the court may void the restraint entirely.

Common Drafting Pitfalls

When we review or litigate non-compete agreements, we often see the same mistakes that make them difficult or impossible to enforce:

• Overbroad Restrictions: Prohibiting an employee from working in a competing business “in any capacity” (even as a janitor) is often viewed as unreasonable.
• Uniform Agreements: Using the same geographic restrictions for a C-level executive and an administrative assistant suggests the company isn’t protecting a legitimate interest, but rather trying to stifle general competition.
• Lack of Protectable Interest: Trying to enforce a non-compete against an hourly employee who had no access to trade secrets or specialized training is generally inappropriate.

Conclusion

Non-compete agreements in Alabama are powerful tools, but they must be crafted with precision. A “one-size-fits-all” document downloaded from the internet rarely survives judicial scrutiny in this state. Whether you are a business owner seeking to protect your trade secrets or a professional analyzing a new employment contract, it is vital to understand the specific statutory framework that governs these relationships.

If you have any questions about this article or non-competes in general, please give me a call or schedule a consultation today. You can also refer to my Business page for more information.

Disclaimer: This article provides a general overview of Alabama property law and does not constitute legal advice or create an attorney-client relationship. You should consult an attorney regarding your specific legal situation.