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Business Divorce: Options When Your Business Relationship Fails

Photo of Stephen J. Golder

Have you ever heard of a "business divorce"? Everyone knows that a traditional divorce is the official end of a marital relationship. However, the term "divorce" is also being applied to the end of the relationship between business owners.

Many small or family businesses succeed because of strong relationships between their owners. In the early stages, the new owners are excited and optimistic about the future. They cannot envision a day when they will not get along marvelously. As the company grows and faces challenges, or when differing interests or priorities distract them, the bond between the owners can sometimes falter or even fracture.

Ideally, the documents that were prepared by legal counsel when the owners started the business clearly spell out the options available to the owners. Too often, though, there are no governing documents other than the basic filing with a secretary of state's office. Also, the governing documents may fail to address what happens if things do not go as planned. This poor planning can lead to further resentment among the business owners, resulting in suspicions and accusations like these:

· using company assets or money for personal gain;

· refusing to allow an owner or member to inspect company records;

· engaging in activities that present a conflict of interest; and

· "locking out" an owner who lacks a controlling interest from company profits and information.

In cases like these, the bond that once was an advantage can lead to particularly hard feelings and personal resentment. Animosity between co-owners can also irreparably damage the value of the business.

Avoiding Nasty Business Divorces through Careful Drafting

Strong organizational documents can help simplify business divorces if and when they occur. Just as a solid prenuptial agreement empowers future spouses to structure their property dealings in case of a later divorce, careful drafting of a company's organization documents puts business owners in the proverbial driver's seat should their relationship later falter.

An experienced commercial attorney can help companies ease the impact of a business divorce by addressing important issues clearly and within the framework of the law:

· Corporate Control: How will the company be governed and how will conflicts be resolved?

· Remedies: What rights will owners have if their relationship sours? Will there be mandatory buyouts? Mediation? If so, what events will trigger those rights and remedies? How will the business be valued and by whom?

· Post-"Divorce" Conduct: Are there any restrictions on competition? What happens with confidential, proprietary, and customer information?

When a company is formed among friends who trust one another, talking about potential conflict can feel unnecessary and uncomfortable, not unlike an engaged couple speaking about a possible divorce.

It is critical, however, that those going into business together realize that discussing a potential breakup is not a negative, but a positive. Instead, embrace the opportunity to work together to arrange your business affairs should circumstances change so that your personal relationships remain even if the business partnership must end. Proactively addressing these issues in your organizational documents will avoid significant grief and significant expense in the future. Remember, business divorces may not happen because of hard feelings, but if a blueprint for the breakup is not in place, hard feelings may sour otherwise amicable relationships.

Using Mediation to Choose the Terms of the Business Divorce

What do you do if it's too late to structure your company to avoid costly litigation over business disputes? Many times, the parties can successfully mediate their differences.

Mediation is an alternate form of dispute resolution that can take place outside the court system. It is less formal than judicial proceedings and has several advantages over traditional lawsuits:

· It tends to be less adversarial.

· It usually costs less.

· It allows the parties to preview the positions and evidence of other parties.

· It allows the parties to explore new remedies that had not previously been considered.

· It can help the parties gauge how an independent observer might view their respective positions should a lawsuit become necessary.

· It gives the parties control over how their disagreements will be handled rather than being subject to the uncertainty of judge or jury decisions.

In addition to these advantages, the cooperative nature of mediation can directly benefit both the owners and the company. Working together toward amicable solutions often preserves professional and personal relationships. Mediation also allows the parties to resolve disagreements in private, avoiding the public display of animosity that could negatively affect the reputation and value of the business.

Litigating When a Business Divorce Is Unavoidable

Sometimes, litigation over a business "break-up" is simply unavoidable. Unresolved conflicts can often escalate, leading to many different types of claims:

· oppression of minority owners or members;

· violation of the duty of care or loyalty or of breach of fiduciary duties;

· breach of contract;

· tortious interference with business relationships;

· unfair competition;

· wrongful discharge; and

· requests for dissolution or termination of the company.

Lawsuits involving a "business divorce" are often extremely complicated, involving numerous legal, corporate, accounting, and tax issues. As you may expect, this can be extremely expensive. When legal action is necessary, it's important to work with an attorneys with significant experience in business law and commercial litigation, someone who can anticipate issues and best position you to achieve your business and personal goals.

Ending a long-standing business relationship is never easy, but working with the right attorney can help put your mind at ease.

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