April 4, 2016
All businesses have owners. Without owners, a business would not exist. The owner starts the business. The owner has success. The owner makes mistakes. The mistakes cost money. The owner learns from her mistakes. So long as a single business owner remains single, she can make any business decision she wants without consulting anyone. She, alone, will enjoy the benefits or suffer the consequences of her business decisions.
Compare the sole owner to the joint business enterprise. For strategic reasons (additional capital, talent, or both), the single owner joins forces with one or more co-owners. They may decide to operate as a partnership, a corporation, or a limited liability company. Once the sole owner joins forces with a co-owner, business decisions must be made jointly. And the types of business decisions that may cause controversy within the organization are many. For example: (a) Should we perform (or decline) this project? (b) Should we hire (or fire) this employee? (c) Should we buy (or sell) this equipment? (d) Should we distribute (or retain) these profits? (e) Should we raise or contribute capital to cover losses? (f) Should we incur (or defer) these expenses? etc., etc., etc.
Every business owner knows there are many business decisions to make every day, every week, every month, and every year. Each owner has passionate feelings and philosophies which may support a particular position or decision. And, each owner’s decision making ability and style may make the decision-making process easier or more difficult. As we all know, there are both advantages and disadvantages to co-ownership of a business.
Many co-owners divide responsibilities. For example, one partner takes Athe office and the other takes the Ashop. One does the bidding and the other supervises the projects. One performs a sales function and the other performs a service function. Some owners delegate their decision making power to the other partners. Other owners want to be involved in every decision, no matter how small or petty. (My favorite example is the argument about the type of soda pop in the company vending machine). In short, there are many and varied things upon which business owners may disagree.
As you can imagine, the number of owners, the size of the business, and the legal entity used, can multiply the complexity of the organizational structure. The more complex the organizational structure, the more difficult it becomes to navigate and untangle once disputes develop. As an example, the simplest business organization is the two-owner partnership. At common law, one partner could dissolve the partnership by simply declaring it to be ended. The dissolution would automatically follow and both partners were free to settle the joint affairs of the business and go their separate ways to pursue their own separate and independent businesses. Upon dissolution of the partnership, the fiduciary duty owed to one another and the partnership would evaporate and the only lasting legal obligation was to wind up the financial and business affairs of the partnership. After dissolution, each partner was free to go their separate ways and pursue the same or a different line of business.
Compare the simple common law partnership with the modern day corporation or limited liability company-multiple owners, sometimes thousands of shareholders, eternal life, limited liability, by-laws, operating agreements, resolutions, annual shareholders and directors’ meetings, fiduciary duties and director and officer liability-it hardly compares! But modern day business requires a modern day business organization. And, when owners disagree on how to stay in business together, the modern business organization needs to be sold, dissolved, reorganized or sometimes simply liquidated.
The Business Divorce
Whether owners have used a partnership, limited partnership, corporation, or limited liability company to operate the business, the term Abusiness divorce generally means serious disagreement between owners about the way to run the business. In other words, is the disagreement so fundamental that the parties should split up and go their separate ways or would one or more like to buyout the other(s)?
Our business divorce cases take many forms. We have partnership dissolution and accounting, corporate dissolution and shareholder derivative actions, and limited liability company lawsuits. In each of these situations, the owners cannot agree on terms of separation, resolving the disagreement, or mutual buy/sell terms. We encourage negotiation before litigation. Negotiation can be difficult in business divorce situations especially since the personalities of the individuals involved may be difficult, stubborn, or eccentric. Like the dissolution of a marriage, many of these owners have been together for 10, 25, or even 50 years! They involve families, spouses, children, grandchildren, uncles, nephews and cousins. Some family businesses pick and choose between which children can be involved. Others mistakenly include all children much to the detriment of company management. I often observe companies that are Astarted by the father, grown by his son, and squandered by the grandson. Sharing a surname is not necessarily a recipe for success.
Moreover, each case is different and carries its own unique set of circumstances. Getting prompt, practical business and legal advice is essential. Unfortunately, many business divorce cases result in the unnecessary expenditure of corporate assets to fund the litigation between owners in disagreement. As they say, an ounce of prevention is worth a pound of cure. Once disagreements between co-owners reach the level of Airreconcilable differences, good practical, legal advice can prevent financial ruin caused by ego-driven litigation.
In a perfect world, business owners would resolve their problems internally, without lawyers or litigation. However, if that becomes impossible, prompt and practical legal consulting, with the creation of an exit strategy and dispute resolution plan, may prevent years of time-consuming and expensive litigation.