Divorce – Corporate Style: A Business Break-Up
Can Be Civil
The break-up of a small business can be
angering and emotional. It can work out satisfactorily for all the
parties if everyone involved – including the lawyers – dedicate
themselves to a successful conclusion. We were recently involved in
such a successful small business “divorce.”
Our clients are two of the three
shareholders (all young professional people) of a new business that
produces educational and promotional activities in a specialized
field. They felt that the third shareholder was trying to take the
company in the wrong direction, alienating important customers. For
this and other reasons, the clients wanted to oust their partner
from his position as a director and president of the company, and to
force him to sell his shareholdings back to the company.
We reviewed the Shareholders’ Agreement
and then recommended that a notice be issued, citing its provisions,
that would ultimately lead to the partner’s removal as a director
and officer of the company and require him to sell back his shares
for book value. We also told our clients to brace for a lawsuit
alleging that they acted improperly and could not force the
book-value buy-back.
The expected lawsuit came immediately, with
angry demands for reinstatement of the partner. We spoke with his
attorney and arranged a prompt meeting of the parties and attorneys.
At that meeting it became clear to the other attorney that the three
men could no longer work together: a business divorce was
inevitable. We went to work to achieve that end, salving bruised
feelings with mutual respect. Our clients agreed to continue their
partner’s salary for a short time (he had been their friend, after
all), and in turn, he agreed to remove himself from all aspects of
the company’s business, not to contact employees or customers, and
not to go to the company’s office. The parties entered into an
interim consent order that embodied those agreements, maintained the
status quo, and provided that they would not publicly disparage one
another.
That consent order gave the parties and
lawyers the time to evaluate the ousted partner’s shares and to
negotiate a buy-out that everyone could accept. The lawyers kept in
constant touch, ameliorating the occasional emotion and frustration
felt by the parties, and negotiating a final resolution.
A settlement agreement has now been
signed, and the lawsuit has been dismissed. The parties are
proceeding in new directions, successfully. The entire process took
six months, miraculously fast for such a break-up. The key to this
success was the willingness of the parties to face reality and the
good will of the lawyers to maintain communications and work hard to
achieve the goals of their clients. In the end, this framework kept
legal fees far more manageable than the all-out war of lengthy
litigation.
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