Common Issues Leading to Business Divorces, Shareholder/Member Disputes & Related LitigationJanuary 14, 2016
Business disputes involving business owners have much in common with divorces between spouses. A “friendly” divorce is possible, but many are acrimonious. The disputes that motivate the principals in a business to sever their relationship can be just as emotionally wrenching or costly as the issues that produce marital divorces.
The Burden of Success
It is easy for business partners to get along in the early stages of business development, while they are striving toward a common goal. Troubles often arise after the business begins to generate significant profits. How those profits should be shared is a frequent source of contention.
Compensation arrangements that seemed fair at the inception of the business may produce resentment as the business starts to thrive. A principal whose activities earn more revenue than others, or who devotes more hours than others to the business, may come to believe that his or her contribution is undervalued. The desire for more money may motivate an owner who feels unappreciated to leave the business.
Disputes that arise from a successful business have a flip side. When a business is struggling, owners who want the business to endure may be opposed by those who think it is time to pull the plug. Some owners may favor making additional capital investments, personally guaranteeing loans, or foregoing compensation until the business becomes profitable. Others might think that a business bankruptcy is preferable to throwing good money after bad. When owners disagree about the wisdom of making financial sacrifices, those disagreements can lead to a business divorce.
Growing the Business
One principal might want to develop a product line or open a branch in a foreign country. Other principals might think those proposals are too perilous. Disagreements about the direction a business should take and the amount of risk it should accept can cause principals to conclude that their differing philosophies of growth are irreconcilable.
When a company’s CEO announces a decision to retire, disputes about which of several principals should succeed to the leadership throne can cause alliances to splinter. Disgruntled principals who are disappointed with the choice of the CEO’s successor may decide that it is time to branch out on their own.
Embezzlement is an obvious reason to demand a principal’s resignation, but other missteps that cast a principal in a bad light, including alcoholism or adverse publicity, might cause other principals to conclude that an owner has become a liability to the business. Embarrassing behavior is a frequent source of tension that contributes to business divorces.
Managing a Business Divorce
When business owners decide to sever their relationship, they might be guided by the terms of a shareholder’s agreement or an operating agreement, as well as other legal documents that affect the resolution of disputes. They are also subject to state laws that govern the form of ownership (partnership, corporation, LLC, etc.) they have chosen.
Whether owners can use the business’ attorney or whether some or all will need to retain their own lawyers will depend on the circumstances. Avoiding conflicts of interest is vital. The first step in a business breakup is to get legal advice about the choice of counsel. Once that is done, principals can obtain advice about the best way to proceed with their business divorce.
At Marshall Grant, PLLC, we prepare and protect clients should a dispute arise, minimizing, or potentially even avoiding, litigation. We handle member / shareholder / partnership disputes and derivative actions, as well as alternative dispute resolution, including arbitration and mediation. To speak with a skilled business attorney about your case, please contact our office at 561-3661-1000 or email us at [email protected].
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