Business Divorces: 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 partnership 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.
One significant cause of a business divorce is a divergence in long-term vision and goals for the company. For instance, if one partner wants to expand the business aggressively while the other prioritizes stability and risk aversion, conflicts over strategic decisions may become irreconcilable. Another common trigger is financial disagreements, such as disputes over profit distribution, investment priorities, or allocation of resources. Issues related to unequal contributions and perceived inequities in workload and responsibilities can also breed resentment and tension between partners. These types of conflicts can erode trust, communication, and collaboration, ultimately pushing the parties towards a business divorce, where they part ways to pursue their divergent paths independently.
The best way to avoid a litigious business divorce is through proper legal planning to agree ahead of time on what happens when business owners want to go their separate ways.
A business dissolution in Georgia may involve a variety of legal issues:
These disputes are often messy, expensive, adversarial, and frankly unpleasant. They also prevent you from operating your business. Instead of focusing on your customers, you will be wasting time and energy working with lawyers.
The old adage – an ounce of prevention is worth a pound of cure – is great advice when it comes to this situation.
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 an LLC, this can be part of the operating agreement or a separate members’ agreement. As for a corporation, the parties usually enter into a shareholder agreement or an operation agreement to address possible disputes.
Why a Shareholder’s Agreement is Essential
1. 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.
2. 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 the advantages of mediation:
What are the Advantages of Mediation?
3. 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. This is key when enticing new investment and very helpful if one shareholder wishes to sell out to a new party.
4. They demonstrate business maturity
A well-drafted shareholders’ agreement illustrates that the business is well structured, mature, credible, and considerate of its members. Again, this is especially important when a company is looking to attract potential investors.
5. They protect founding shareholder interests
As a founder of a business, you want 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 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 often join forces to share overhead, as well as an exchange of professional experience. While there are many advantages to owning a professional practice with others, a business dissolution such as this poses unique challenges. For example, client files are oftenconfidential, so there are rules of professional responsibility that must be adhered to. There is also the issue of who “owns” a client and their files or patient charts, and the issue of provider contracts with insurers. At Lober & Dobson, LLC, we have helped professionals navigate this complex process while looking out for not only our client’s best interests but the best interests of your clients and patients.
Summary
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, working with an experienced attorney who can help navigate the legal process and protect your interests is important. At Lober & Dobson we have helped many businesses navigate this process.
If you are facing the dissolution of a business partnership, the lawyers at Lober & Dobson, LLC are here to help. We bring over 50 years of combined experience to our business litigation practice, with expertise in the following areas:
Contact us today if you are dealing with a business dissolution in Georgia or hoping to avoid any issues in the future.
