Business “Divorce”

Unfortunately, like many marriages, businesses frequently end in “divorce.”  The reasons for the demise of a business can range from petty disputes involving ego to deep seated financial problems.  Deadlocks as to the direction and operation of a company can cause substantial emotional distress as well as financial loss.  Also, parties being squeezed out or treated inequitably by their business associates must find a way to protect their rights.  Just as in a marital divorce, business divorces can be complex, long and expensive and the financial stakes are high.

In such cases, the lawyer’s role is to evaluate all the facts and determine the most productive method of resolving the issues.  The lawyer’s analysis will depend on whether the business is a partnership, corporation or other type of entity.  It also will depend on the underlying documents regarding the formation and operation of the business and whether the parties previously reached agreement on what to do when things are not working.

Often the method to resolve the dispute will involve either the closing and liquidation of the business or an owner buy-out.  This can occur by the terms of the underlying documents, by post-dispute agreement or by judicial order.  The method and procedures will depend on the specific facts of each case.  If a buy-out is involved, valuations and financial issues usually predominate.  Often, the client must retain an expert to value the business and perhaps provide creative ways for the buy-out to be financed.

If a solution cannot be accomplished by agreement, then the parties must look to the courts.  Sometimes it may require something as simple as filing a petition to compel inspection of the books and records of the business to settle the dispute.  Other times, a formal complaint seeking recovery and relief under the common and statutory law, such as for breach of contract, breach of fiduciary duty, appointment of a receiver or provisional director, an accounting, dissolution, winding up, and distribution of assets, is necessary.

Generally, the courts have only limited remedies and are rarely able to order a buy-out absent an agreement providing such relief.  The parties usually are wise to consider a negotiated settlement. The best bargaining leverage is generated by properly identifying and evaluating all your options and thereafter communicating a strong and precise position to the other side.  It is essential to intelligently and carefully design a strategy that realistically fits your interests and objectives.

– Curt Ward

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