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The Business Divorce: If Things Aren’t What They Used to Be, It May be Time to Move On

August 16, 2016

Posted in Partnership Law

photo - business divorceIf it’s more than you running the business chances are pretty good the relationship between you and other owners will hit a rocky patch at some point, maybe even become adversarial. Breaking up that business relationship can be seen as a divorce. With some thought, planning and proper execution the split need not necessarily a traumatic break up.

A business divorce is a court-ordered dissolution of a business entity that the parties are involved in. They normally involve corporations, limited liability companies or limited partnerships, though they can also involve general partnerships. Depending on the circumstances this type of dissolution may be not possible or is just not the best option for you. There are other methods that can create leverage for you resulting in a better outcome.

How things can or should end depend on a number of things, including the form of the entity and any agreements between the parties. You would also need to consider state statutes, bylaws and any agreements.

If a partner is not controlling the company or part of management, he or she has a right to inspect the books and records of the company as long as there is a proper purpose for seeking these documents.

  • In a business divorce you might say you’re “investigating possible mismanagement” or “valuing my interest in the company.”
  • Company documents could be the basis for a lawsuit against the managers or directors.
  • Your request to look at books and records may spark a discussion between you and management about how your concerns could be resolved.

The stockholder, member or partner can sue the persons or entities controlling the company for damages due to breach of fiduciary duty or the relevant agreements. If successful, on paper this type of action will not break up the relationship, but as a practical matter that may be the best way to settle the case.

If you are thinking about a business divorce, think about,

  • What are your goals? Where do you want to be at the end of the process? Complete separation? Keeping a business relationship but changing the economic relationship? Want the relationships to be the same but you want compensation for losses?
  • What is your budget? Breaking up these relationships can be very emotional and you can lose sight of the bottom line. You need to be rational about the economic realities you’re in, not just slug it out in a courtroom to punish another person.
  • What is your strategy? What’s the best way to match your goals, your budget, the facts and applicable law? What’s the least expensive, most effective way to get what you want?
  • Expect the unexpected. An emotional business divorce can cause rational people to make irrational decisions.

Each situation is unique but one piece of advice applies to all cases. Talk to an attorney before you disclose to others you want a business divorce or take any actions that may come back to haunt you. You need to know where you stand legally before you can make an informed decision as to what your goals are and the next steps that need to be taken.

If you are considering, or in the process of, a business divorce, contact our office so we can discuss your situation, how the law may apply and what you can do to reach your goals and protect your legal rights and interests.