Business Divorce Lawsuits

April 27, 2021

This is the first installment of a two-part blog exploring an important topic that is too often ignored: business divorce. When family members, friends, or business associates come together to launch a business, rarely do they take time to consider what will happen if things don’t work out.

The formation period is one filled with optimism, but the reality is that too many business enterprises enter the realm of irreconcilable differences including unresolved disputes, hard feelings or different viewpoints.  These differences typically ferment over periods of time without either effective communication or meaningful compromise. In the event this happens to your business, you should make sure you have a team of experienced attorneys protecting your rights, your assets and your other interests. 

It is difficult to walk through the many steps of litigating a business breakup, because there are no cookie cutter approaches. There are many variables to consider, including, but not limited to:

• How many owners (shareholders, partners, members) the business has;
• What specifically is spelled out in the controlling agreements (shareholder agreements, partnership agreements, operating agreements, employment agreements) in the event of a breakup;
• The driving forces behind the reasons for the falling out between owners (e.g. age, differing viewpoints on direction of the business, differing viewpoints on the value each owner brings to the business, compensation, personality disputes, longstanding family resentments);
• The business or industry;
• The nature of the revenues, assets and liabilities of the business;
• The value of the business and methods used to value the business;
• Whether the business will continue, or be dissolved.

 

This is why we meet with every client considering or confronted with a business split up or business divorce.  Understanding all of the particulars is critical to developing strategy designed to meet our clients’ goals. There are some general elements to the process we can safely say apply to many business.

1. It won’t be quick and easy. If you have reached this point, there is likely enough of a gap between you, that resolution won’t be simple – if it were, you would have already resolved it. Mentally prepare yourself for a protracted, and possibly expensive process. We work with our clients to make the process as efficient, affordable and expedited as possible.
2. It can get ugly. A business divorce is not unlike a divorce between a married couple. In the beginning, there was never a thought it might end, but now each side may find themselves jockeying to gain leverage over the other party. That can mean your partner leveling tough accusations at you, working to dig up dirt, or calling into question your past actions.
3. Don’t lose sight of your business. Assuming the intention is to keep the business operational in some form after the split, keep minding the store. Too often we see cases where business partners get so tangled up fighting each other, the business suffers, and in some cases is harmed irreparably.
4. Never give up on a peaceful resolution. We never rule out a mutually agreeable, peaceful resolution to the problem. We have handled cases that appeared to be permanently gridlocked resolve through creative problem solving.  We work with our clients to identify and prioritize their goals as well as protect their interests.

 

While the best case scenario is to have everything spelled out clearly in the agreements entered into between business owners before trouble arises, the causes of messy business separations cannot always be anticipated or avoided.  However, with the right legal advocate in your corner, you can minimize the negative impact and maximize the most equitable outcome for you and your family.

Visit our legal blog next week to review Part II of our look at business divorce. My partner, Trevor Torcello, will offer some valuable advice on being proactive to minimize the chance you and your partners end up in litigation.

Hugh Carlin’s practice includes wide-ranging federal and state court experience in civil litigation within employment law, environmental defense, class actions, product liability defense, corporate dissolution and shareholder disputes, “business divorce,” breach of contract, OSHA and insurance coverage disputes. 716-854-4300 ext. 240. hcarlin@gross-shuman.com