The Business Divorce

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Over the years, I have been called to represent business owners who for one reason or another have come to the point where they need to end their relationship with the co-owner of their business. Whether it’s a partnership, corporation or limited liability company, the approach is basically the same. At the end of the day, it is the lawyer’s job to strategize so that the client is treated fairly and ends up with the ability to continue his/her career or is paid enough money for his/her share of the business. The tactics to achieve this goal are, of course, critical.

Two lawyers have been partners for 48 years surprisingly decided they could not stand the sight of each other. But who takes over the clients, the offices, the personnel? Neither had the right simply to oust the other. Claiming deadlock and going for a judicial dissolution would take too long and cede control of the outcome to the vagaries of the court system. A wife and husband have an array of statutes and precedents to rely upon in working out their separation. But co-owners of a business have no counterpart to govern their divorce. The unhappy partner can simply walk out, but risks losing everything in doing so.

First, identify what rights are given to the owner by existing law. For instance, in a corporate form, there are statutory rights to annual meetings, shareholder votes and periodic accounting statements. Often, in closely held companies these rights have been ignored for years. Often, a violation of a shareholder’s rights can be triggered by a broad, comprehensive request to examine corporate records under O.R.C. §1701.37(C). Certain corporate records must be maintained (O.R.C. §1701.37(A). There are similar statutory requirements for partnerships and LLCs. There may be rights created by a shareholder or partnership agreement and in an LLC there are rights created by the operating agreement.

Second, identify the ways these rights have been violated. Denial of such rights creates a perfect platform for equitable relief. Other events that provide an entree to seek relief include usurping a corporate opportunity to engage in a related business or expand into another territory; excess compensation or the employment of relatives; discharge of the unhappy plaintiff/owner; spending company funds on personal matters; or failure to distribute the funds necessary to pay taxes on K-1 income.

Third, fashion a legal claim based on the right that has been denied that will result in the outcome needed – usually an agreed buy-out or division of the business. No lawsuit can provide these outcomes. There is no prayer in a complaint saying “Wherefore the plaintiff seeks a buyout.” We are accustomed to suing for damages, but that type of litigation can take many months if not years and may not necessarily achieve the desired outcome. A judicial dissolution is also insufficient as the likely outcome is a liquidation of the business. Any lawsuit must put the defendant in court quickly and become such a nuisance or impediment to his business that he/she will be constrained to agree on a settlement that achieves the desired outcome quickly – a negotiated resolution that wins the plaintiff either the buy-out or the division of the company that is needed as a practical matter.

Once the valid cause of action is established, expedited discovery necessitated by the shortened timeframe of a claim for emergency relief puts the defendant to the trouble of responding quickly and also the disadvantage of admitting the validity of the plaintiff ’s factual allegations. One time opposing counsel complained to me that I was going to kill the golden goose. I replied that it did not matter to my client because he was not getting any of the golden eggs. Here again, it is the imaginative, aggressive litigator who creates an atmosphere which disposes the defendant to seek a quick resolution. The idea is to create the opportunity to appear in front of a judge as soon as possible for a substantive ruling that puts the defendant at risk. The threat of that ruling is the tool to bring the defendant to the conclusion that a settlement is the preferable outcome.

The foregoing recipe for assisting a mistreated minority shareholder is meant to achieve a quick and fair settlement. The client must be made aware early on that if the defendant refuses to settle and the emergency relief is denied without a settlement, then the litigation will go on to a natural conclusion. Time and money will be spent in the process.

At the end of the day, it is the lawyer’s job to assist a client who’s rights and property interests have been damaged by his business partner’s actions to the extent that he no longer wishes to remain a business partner. That assistance may focus on the actual reasons for the client’s unhappiness but may also require that other reasons for action be pursued that ultimately will bring about the desired result.  Mark Cohn

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