Like a marital divorce, the dissolution of a business or a “break-up” of a company due to ownership and partner in-fighting is typically referred to as a “business divorce”. Just as in a marriage when the relationship sours between two or more business partners, those partners need to identify what the difficult issues are: Do they wish to continue in their business partnership, or would they rather end that relationship either by dissolving the business, selling the company, or one owner buying out the other owner?
Like any conflict, business divorce does not discriminate. It occurs in all types and sizes of companies, firms, partnerships, businesses, professions, and industries. When the differences between owners becomes irreparable, then a business divorce is unavoidable. It can affect members in professional firms, owners of supply/distribution service businesses, or retail entities. A business divorce can be pursued amicably by negotiations or mediation, or it can be fiercely litigated in court between the company owners.
Similar to a pre-nuptial agreement in a marital divorce, the rights and duties of business owners are normally governed by an Operating Agreement if the company is a limited liability company, or a Partnership Agreement or Shareholder Agreement if the company is either a partnership or a corporation, respectively. However, not all owners have the foresight to craft and execute such a critical management document when they start to form their company. Not having an Operating Agreement or Partnership Agreement means the owners’ rights and duties against each other are governed by statutory law.
When a business dispute between co-owners results in litigation, there is typically a multitude of issues to be addressed or resolved, either by amicable resolution, or by court order. Prominent issues typically include:
- Is there a written, signed Operating Agreement or Partnership Agreement for the company?
- What are each member/partner’s ownership rights?
- What are the assets/debts of the company?
- What are the business opportunities/prospects of the company?
- Does the court need to appoint a neutral third party to manage and preserve the value of the company?
- What is the value of the company, and is it financially stable?
- Do any of the owners/partners wish to continue the business of the company?
- Are existing owners/partners willing to “buy-out” another owner/partner who wishes to leave the business?
- What, if any, improper or illegal conduct has been perpetuated by any of the owners/partners?
- Is there a reasonable concern that any of the owners will steal from the company, or abscond with any of the company assets?
Whan a business divorce between owners is inevitable, the retention of legal counsel who is experienced in litigating business dissolution cases is critical. The retention of, and prompt consultation with, counsel as soon as possible is essential to preserving and protecting your rights, and possible obligations you may have to the company or your co-partners.
Timothy D. Lyons is a Senior Partner and Co-Chair of the Business Litigation Department of Jardim, Meisner and Susser, P.C. Mr. Lyons specializes in representing business owners in business dissolution, intra-company disputes, and “business divorce” matters, at both the pre-litigation and trial stages, if the necessity of filing litigation to finalize the dissolution is required.