How to Avoid Litigation and How to Win
A “business divorce” refers to a dispute between business partners or owners that results in the dissolution of the business relationship or a change in ownership structure. This term is often used to describe the process of separating from a business partner, which can be a complex and emotionally charged situation. As discussed below, the best way to avoid a litigious business divorce is through proper legal planning to agree ahead of time what happens when business owners go their separate ways.
A business divorce in Georgia may involve a variety of legal issues:
- determining ownership of the business
- addressing trade secrets and intellectual property
- dividing assets and liabilities
- settling any outstanding debts or obligations.
These disputes often are messy, expensive, adversarial, and frankly unpleasant. They also prevent you from operating your business, rather you will be wasting time and energy working with lawyers…not your customers.
The adage, an ounce of prevention is worth a pound of cure, is great advice here….so a few words on that:
Avoiding or Minimizing the Dispute
The best way to avoid or at least minimize the emotions and destruction of the business is by having clear agreements between the parties which give unambiguous direction in the case of a disagreement. For LLC’s this can be part of the operating agreement or a separate members’ agreement. For a corporation, the parties usually enter into a shareholder agreement to address possible disputes. Here are some reasons why a shareholder’s agreement or operating agreement is essential.
- They decrease the likelihood of shareholder disputes
Drafting a shareholders’ agreement requires shareholders to consider and anticipate any issues that may become a concern in the future. By asking these key questions early, such as which shareholder should have the casting vote in a tie vote, what happens if a shareholder wishes to leave the company, or what happens if the company needs a shareholder loan? Issues are brought to the surface before becoming a nasty situation, which can then be cleanly and appropriately addressed in the shareholders’ agreement, avoiding costly future shareholder disputes. - The agreements can provide a dispute resolution process
You can save time and money by requiring mediation before litigation. Mediation is a great tool to come to reasonable solutions to problems. For a deeper dive into why mediation:
https://www.americanbar.org/groups/public_education/resources/law_related_education_network/how_courts_work/mediation_advantages/
https://www.k-state.edu/hcs/employee-relations/dispute-resolution/mediation/advantages.html - They provide a clearer understanding of the company for future investors
A shareholders agreement provides clarity for future investors to understand the mechanisms, rules, rights, and responsibilities that apply to shareholders and how they are expected to conduct themselves as members of the company; key when enticing new investment and very helpful if one shareholder wished to sell out to a new party. - They demonstrate business maturity
A well-drafted shareholders’ agreement illustrates that the business is well structured, mature, credible, and considerate of its members. This is again especially important when a company is looking to attract potential investors. - They protect founding shareholder interests
As a founder of a business, you’re usually looking to protect your initial capital and sweat equity invested. A shareholders’ agreement will allow you to ensure that founding shareholders maintain the desired level of control (and reward) in the company moving forward.
Special Considerations for Non-Competition and Trade Secrets
Generally business owners have fiduciary obligations to each other, but they are limited and can be varied by agreement. Pre-planning it is important to address non-competition if a shareholder or member leaves the business and what may constitute trade secrets. Also, you may want restrictions on soliciting the business’ employees. Having the proper agreements in place can prevent costly and time-consuming litigation down the road.
Special Considerations for Professional Businesses
Professional practice groups of doctors, psychologists, dentists, lawyers, accountants, or other professionals join to share overhead, as well as an exchange of professional experience. While there are many advantages to owning a professional practice with others, a dissolution poses unique challenges. Client files are confidential; there are rules of professional responsibility that must be adhered to, who “owns” a client and their files or patient charts, what about provider contracts with insurers. We have helped professionals navigate this complex process looking out for not only our client’s best interests, but the best interests of your clients and patients.
Summary
- Have clear and well written agreements in place.
- For an LLC, a strong operating agreement is the contract between the members (partners).
- For a corporation, a shareholders agreement helps settle issues before they arise.
- Require Mediation before filing a lawsuit.
- Be Fair and Open Minded but Do Not Give in to What is Not Fair
If a business divorce in Georgia cannot be resolved through negotiation or mediation, the partners may need to litigate the dispute in court. In this situation, it’s important to work with an experienced attorney who can help navigate the legal process and protect your interests. At Lober & Dobson we have helped many businesses navigate this process.
