What is a Business Divorce?
*This is a transcript of the Facebook Live video from 6-8-18 Click here to watch the video.
It’s basically when one or more partners of a business decide that they no longer want to be in business with one or more of their other partners. They’re almost enumerable ways that that can happen. The classic way is two business partners.
Each have 50/50% of a company, and one decides that he can do better on his own and wants to go off and do that and exclude the other partner. Or one partner just decides that she doesn’t like the way the other partner wants to do business, and she wants to have nothing more, that she wants to move on. This also could concern situations where you might have one employee, a key employee who has a certain ownership percentage of a business.
Frequently, we see highly placed executives like members of the C suite, chief executive officers, chief financial officers, that sort of thing you have 10%, 15%, 30% or more ownership interest in the company, and the company decides for whatever reason that they want to terminate the employment relationship. Well, that also might trigger a cashing out, if you will, of the ownership interest, and sometimes companies don’t think that all the way through when they start that process down the road. It also can be a problem if the employee decides that she wants to go off and start working for another company.
She’s not as free to do that because she still has that ownership interest in the company, so that’s another type of business divorce. We have situation where you have majority shareholders, whether it’s one shareholder or a group of shareholders that control the company and one or more minority shareholders that don’t like the way the company’s being run. Perhaps they don’t like some business practices. Perhaps they don’t think their return on investment is high enough. Perhaps, they’re just frustrated because they’re shut out of the decision making, and so that can result in a business divorce, different types of litigation.
These situations arise out of a number of different fact patterns, and it’s important as the business owner makes plans on how to proceed with that, that they get some legal advice on what duties they owe to everyone, what duties are owed to them, and what’s the best way to begin to untangle that dispute. The next question is: “How can I resolve a partnership dispute?” Well, again, the best practice is through communication and transparency and dialogue with the other partners.
I’ll tell you I have frequently been involved in situations where as a lawyer I come in at the end of the relationship, and I can look back and see that there’s been miscommunication, lack of communication, or just plain hostility between people that really has built up over time, and that personal relationship has deteriorated to the point where it starts to affect the business relationship. One sometimes wonders if at the beginning of the dispute, if the parties had sat down in some sort of non-threatening, non-adversarial way and tried to work through the problem, if they could have avoided some of the disputes that came along.
Absent that, one of the first things I would do is to go get a lawyer, and you might say, “Well, Crone, you’re a lawyer. That’s going to be the first club out of your bag.” Well, perhaps, but you really need someone to advise you on your strategy because there are lots of legal agreements that may come into play. You may have an employment agreement as well as a shareholder agreement.
There may be non-competes, other restrictive covenants. Everybody’s going to owe each other fiduciary duties and duties of loyalty, and sometimes the action that feels the best, well, let’s just lock it. Let’s just lock them out of the bank account, or let’s do this or let’s do that in order to frustrate or madden the other party a lot of times is counterproductive. It’s good to have a lawyer say, “Well, have you considered the ramifications of this?” The best way to resolve these disputes, as I say is to try to get the core of the dispute out onto on the table.
I’ve counseled some ownership groups to seek some group counseling to really begin to understand what is the problem with the dynamic among the ownership group that’s causing these problems. Because sometimes even though the solution may be well, we’re just going to dissolve the company, well you end up killing the golden goose. You end up killing a company that’s really working because you can’t work together, and you really out to try to avoid that. Sometimes the parties just can’t afford to buy each other out based on the valuation of the company. The company’s doing so well, but it doesn’t have a whole lot of cash, but it’s got a lot of business. Maybe it’s leveraged, and so there’s not a whole lot of equity to pull out of the company to buy one party out or the other.
I think you’ve got to be realistic going in and level headed about what are the business realities that you’re dealing with and what are the real limitations on what can be done to solve the problem, and it may be that you have to agree to a long-term solution that everybody can live with rather than trying to pull a band-aid off. As I said, every situation is a little bit different, and so the first step is to get some professional help. Maybe the first step isn’t a lawyer. Maybe you go to your accountant or an accountant and say, “Hey, this is the problem we’re having. What solutions do you see?” The accountant may be able to help you with some of the business issues that are at issue.
There are also a lot of business coaches out there who can come in and help evaluate a situation and provide some advice. The first thing I would do is try to get some outside advice, get some third-party eyes on your situation, whether it’s a lawyer, an accountant, a business coach, or someone else to help you see beyond maybe what are some of the personal emotional issues and what are the real business realities that we’re dealing with.