Business Divorce Checklist: 5 Tips for Breaking Up with a Business Partner
This arduous process of untangling the relationship can be just as emotional and difficult as a divorce of married spouses. Regardless of whether you are a majority or minority owner, it is important to consult with a business divorce lawyer at the first signs of trouble.
Here is a checklist of 5 things you can do early on to resolve your disputes wit your business partner without need for drawn out and expensive litigation.
1) Dust Off the Company's Governing Documents
Most businesses have contractual agreement which direct how they are managed. With a limited liability company, there is an Operating Agreement, with a corporation there is usually a set of bylaws, and with a partnership there is usually a partnership agreement. Those governing agreements list the responsibilities of each of the partners and should direct what happens in the event of a business divorce.
If you never executed one of these documents, consider proposing one to your partners to spark the conversation about whether the parties wish to continue in business together. That process might also lead to a discussion of how the company can me managed differently going forward which might do away with the desire for a business divorce. At minimum, you will be able to direct how future disputes will be resolved, perhaps through mediation before a a lawsuit or an arbitration is commenced.
2) Identify Any Breach of Contract by Your Partner
These critical documents are contracts between the parties. So, they impose obligations on each of the partners in many ways, including how the company will be managed, how the finances of will be handled, and possibly might include specific fiduciary obligations and restrictive covenants.
For example, an Operating Agreement may contain restrictive covenants like non-competes, non-solicitation, and confidentiality provisions. It also may specifically direct what if any transactions the partner may enter into and whether or not the consent of the other owners is required. If you have evidence of a breach of contract by your partner, that may be the leverage you need to get him or her to start acting reasonably.
3) Identify Breaches of Fiduciary Duties
In addition to the contractual obligations discussed above that may lead to a breach of contract, many state laws impose fiduciary duties upon the partners. Whether or not the partners owe fiduciary duties to each other partners is a complicated question that must be answered by a business attorney pursuant the state's law in which the business was incorporated or headquartered.
For example, most owners owe a fiduciary duty of loyalty requiring him or her to act in the best interest of the company as opposed to his or own self-interest. This also means that a partner cannot capitalize on opportunities for their own benefit when those opportunities should have flown through the business (this also known as "usurping corporate opportunities").
4) Review Company Credit Card and Bank Statements
One common impetus for a business divorce is when the managing partner is accused of mismanaging the company's finances or wasting corporate resources. It is critically important then to demand access to the company bank and credit card statements from inception. That way you can keep an eye on the money that your partners are spending.
But do not fret is you do not have access to the company financial records because most states have a mechanism that allows you to make a request to audit and review the books and records of the company. See e.g., New York Business Corporation Law - BSC § 624, New York Limited Liability Company Law Section 1102, New Jersey Revised Statutes, Title 14A - CORPORATIONS, GENERAL Section 14A:5-28.
5) Have a Business Divorce Attorney Send a Demand Letter
While most business owners will try to work things out among themselves, sometimes a relationship is so broken or one party feels they hold all the cards, making a resolution among the parties impossible. At that point, you should consider retaining an experience business divorce lawyer to review the controlling agreements, analyze the facts, and perhaps write a detailed demand letter. For the demand letter to work, it should clearly detail the parties' obligations under the business' governing documents, itemize and list your co-owner's failures and malfeasance (citing to specific evidence you've uncovered (e.g., evidence of unauthorized spending or attempt to lure away company clients), and ultimately proposes a resolution that avoids litigation.
Many clients come to Russo Law LLC claiming they are ready to go to court but most eventually to regret that initial stance. Most judges will push the parties to reach an agreement on their own especially if the business under scrutiny is a small to mid-sized one that might not be able to support the legal fees necessary to take the case to trial.
There is no "one size fits all" solution for business divorces because each is complex involving sensitive personal, financial, tax, accounting and potentially employment issues. Therefore, the negotiation of a consensual resolution (as compared to a court-ordered dissolution) may be messy and will have lots of ups and downs If done the right way, however, you will be spared of years of future aggravation because you will no longer interact with your partner and you won't be worried by the chronic uncertainty and anxiety associated with complex litigation or other forms of alternative dispute resolution such as arbitration.
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