Ask General Counsel: What should I consider during a business divorce?

In this edition of Ask General Counsel, the attorneys of General Counsel P.C., based in McLean, discuss what a business owner should consider when their business relationship fails.

Business relationships fail for many different reasons: Business partners may have long-term disagreements, a change in leadership, or simply a desire to go in different directions.

Even successful businesses may have to deal with business breakups if business partners decide that the benefits of continuing their business relationship are outweighed by the costs accompanying their continued co-ownership of the business. Breakups are never easy, and business relationships are no different, but there are some things business owners can do to help prepare themselves for the eventual divorce.

Plan Ahead – Have a Written Agreement at Formation: Any business with more than one owner should have written documents. If you don’t, contact us today! Even if business partners don’t ultimately decide to part ways, some type of conflict is almost inevitable. For this reason, it is vitally important to plan ahead and have some type of operating agreement or corporate shareholders agreement in place at the start of the business relationship to help guide the resolution of conflicts later on. A well-drafted agreement at the time of business formation can help to prevent a deadlock from occurring over disagreements about how to end the relationship.

What Are My Options During a Business Divorce? Many business disputes arise when there is a deadlock between the owners, and the owners’ inability to agree results in the business being unable to make business decisions.

There are a few different ways to deal with such deadlocks and a resulting business divorce. One option is to appoint a provisional director, who serves on a corporation’s board of directors until a deadlock is broken. Another option is a buyout, where majority owners purchase minority owner’s remaining stock. Business owners can also consider complete dissolution of the company, selling all of the company’s assets and parting ways.

Additionally, business partners may want to use mediation to allow a neutral third party to help resolve business disputes. If none of these alternatives are able to generate a resolution, parties can seek legal remedies in court, but that option is often costly, time-consuming, and not usually preferable.

Remember Your Fiduciary Duties: Even if it’s certain that a business will soon be dissolved, business owners must use caution to ensure they do not take any actions against the company in bad faith. Until a dissolution is official, business owners may owe a fiduciary duty to the company, as well as to each other.

If one co-owner plans on leaving the business to start his own competing business, he may be in violation of non-competition or non-solicitation agreements. The specific duties owed to the company and other business owners vary depending on the type of business entity involved. For example, business owners using company resources for their new businesses or asking clients to leave the business and instead go to the new business may face liability for tortious interference with contract expectancy, civil and statutory conspiracy, as well as other claims.

Contact General Counsel P.C. – Disengaging from a business relationship is a complicated matter. Having to decide the best course of action and not knowing what you can and can’t do just adds to an already stressful and difficult situation. Seeking help from experienced professionals who can help guide you throughout the process will help lessen the burden and make the process run more smoothly. General Counsel, P.C. attorneys are specialized in business law and have experience working with business owners. Contact General Counsel P.C. at [email protected] or call 703-556-0411 today to see how we can help you.