Considering A Business Divorce?

by Apollo Carey

Business relationships can be complex and emotional. Below are a few typical considerations of business owners who can see the proverbial “writing on the wall” and are considering a business divorce. Business owners would do well to seek expert legal advice as early as possible if they anticipate the deterioration of a business relationship.        

Does the governing document of your business cover your particular issue?  

This is one of the most important considerations – if not the most important – in a business divorce whether your governing documents are in the form of bylaws (corporations), operating agreements (LLCs) or partnership agreements (partnerships).  Nine times out of 10, if the governing document was drafted correctly and comprehensively, the issue at the center of the business divorce will be covered (or affected) by some provision in the document. So it’s certainly important to obtain a copy of the document, locate the relevant language and understand how the language affects your rights.  

Which state law governs the interpretation of your business’s governing document?

A properly drafted governing document should explicitly indicate which state law governs its interpretation. This is important because different states have different common-law legal standards for issues typically related to business divorces, such as decision making, dissolution, sale business interest, and admitting new members/partners/shareholders. If for some reason your business’s governing document fails to explicitly address the issue giving rise to the business divorce (or in some cases, even if the document does address the issue), state common law will govern the dispute.  

What do you want to accomplish in your business divorce?

Consider your ultimate goal(s) in pursuing a business divorce. The achievement of your goal(s) will depend upon the language of your governing documents and your leverage as a minority or majority owner of the business. The ultimate goal(s) of your proposed course of action should have a direct effect on the steps taken in pursuit of the goal in a systematic way in order to minimize opposition and maximize the chances of achieving your goal(s). So it is important to keep your ultimate goal in mind when pursuing a business divorce and govern yourself accordingly.  

Is time of the essence?

Just like a domestic divorce, a business divorce can be accomplished via out-of-court settlement (sometimes with subsequent court approval) or by initiating a lawsuit. Obviously a business divorce that takes place out of court is less costly and generally less time-consuming than an in-court business divorce. If time is a major factor in effectuating the divorce, then working out a deal with the other owners may be the best solution. If, however, time is not of the essence and you are unable to work out a satisfactory settlement of your issues, then be prepared for your business divorce to end up in court.  Similar to the process for a domestic divorce, this process can take years if the issues are hotly contested by the parties. 

Apollo Carey is an attorney working in tax law for Sandberg Phoenix & von Gontard PC.