Resolving Issues Arising Out of a Business Breakup (or Business Divorce)

Business breakups can be both time-consuming and expensive. They often end long-standing relationships; and, while cutting ties may be the best option under the circumstances at hand, it can present a variety of challenges that all parties involved must work to overcome. In a business divorce, the parties either need to be willing to work together or else they need to be prepared to resolve their differences in arbitration or in court.

While there are a variety of issues that can lead to a business breakup, there are also several issues that can arise during a business divorce. Resolving these issues, whether amicably or through arbitration or litigation, requires strategic planning and execution. All parties involved should work with experienced legal counsel, and all parties should ensure that they have a clear understanding of the options that serve their best interests as well as the best interests of the business’s clients or customers.

Issues that Can Lead to Disputes During a Business Breakup

When going through the process of dividing a business or divesting one or more owners’ interests in the company, numerous issues require careful consideration. Due to the nature of business breakups, owners’ interests will often be adverse to one another, and this means that disputes and litigation are fairly common. Some examples of disputes that can arise during a business breakup include:

Disputes Regarding Control

Many business breakups result from disputes regarding control of the business, and these disputes can carry over into the breakup process as well. If a partnership agreement, operating agreement or shareholder agreement is unclear about the steps to be taken when the owners decide to part ways, the owners may not be able to reach an agreement regarding the direction to be taken or who should manage the process if the owners are unable to manage it jointly.

Disputes Regarding Rights to Distributions

Disagreements regarding the owners’ respective rights to distributions of partnership or company assets can also lead to contentious disputes. Here, too, while the entity’s governing documents should provide clear guidance, they often do not. Absent clear direction from the partnership agreement, operating agreement or shareholder agreement, the owners will need to find a way to come to terms—or else ask an arbitrator or judge to make a decision for them.  

Disputes Regarding Buy-Out Rights

In some cases, a business breakup will involve winding up the business and closing its doors. In others, one or more owners will continue to operate the business while other owners move on to new ventures. If the owners agree that it’s time to move on from one another but disagree about who should stay and who should go, the absence of clear and binding contractual guidance can lead to contentious disputes in this scenario as well.

Disputes Involving Efforts to Remove Owners

Along with disputes regarding buy-out rights, disputes can also arise when one owner seeks to forcibly remove another. While partnership agreements, operating agreements and shareholder agreements will often include provisions for the removal of owners in certain circumstances, lack of clarity and unanticipated scenarios can leave room for interpretation (which, in turn, leaves room for disputes).

Disputes Involving Allegations of Fiduciary Breaches or Fraud

Disputes also frequently arise when one or more owners of the business make allegations of fiduciary breaches or fraud. If one owner accuses another of misappropriating business assets, diverting business opportunities or causing the business to fail, this is almost certain to lead to animosity. While some owners will be able to work through their differences by focusing on the bigger picture, these types of allegations can also make litigation the inevitable path forward.

Means of Resolving Disputes During a Business Divorce

Regardless of the issues involved, when co-owners encounter disputes during the business breakup process, they have a variety of options for moving forward. Choosing which option to pursue requires consideration of multiple factors, from the terms of the parties’ agreement to the practicalities of the circumstances at hand. With this in mind, broadly speaking, the options for resolving disputes during a business divorce include:

• Guided Negotiations – Negotiating a resolution avoids the additional costs of alternative dispute resolution (ADR) and litigation. It also avoids the inherent uncertainty of relying on an arbitrator or judge to consider the evidence and render a binding decision. Even when separating business owners are unable to come to terms on their own, they will often be able to make progress by engaging lawyers to help them explore options and negotiate reasonable terms.  
• Mediation – Mediation involves working with a neutral third party who is not a decision-maker. Rather than resolving business owners’ disputes for them, mediators serve as facilitators to help keep their negotiations on track. While some partnership agreements, operating agreements and shareholder agreements will call for mandatory mediation in the event of a dispute, business owners can also pursue mediation voluntarily.
• Arbitration – Arbitration can also be mandated by contract or pursued as an alternative to courtroom litigation. Arbitration falls between mediation and litigation, with the parties engaging in streamlined discovery, pre-hearing and hearing procedures before handing their dispute over to the arbitrator (or panel of arbitrators) for a final decision.
• Litigation – If co-owners of a business are not able to resolve their differences between themselves and choose not to pursue arbitration, then they will need to take their breakup to court. The complexity and timetable for litigation depend heavily on the scope of the issues involved, though it is fairly typical for the business litigation process to take a year or longer.

Discuss Your Options with a Lawyer at Edelboim Lieberman

If you are going through a business breakup and need to know more about the options you have available, we encourage you to contact us for more information. Our lawyers have extensive experience advising and representing business owners in these scenarios. To schedule a confidential consultation at Edelboim Lieberman, please call 305-768-9909 or get in touch online today.