Business Divorces
Business relationships require maintenance, and disagreements can evolve quickly into real or perceived issues regarding management, control, and compensation. People rarely see the same equity between founders, rain makers and producers, and calm consideration is not a quality that thrives in this context. Control and power, combined with the emotions of a marriage and the aggressive nature of litigation counsel, can make managing relations with business associates more difficult than a marriage. It is not uncommon for the result to be a business divorce. If your form of business is a limited liability company (LLC), the legal basis for divorce can be surprisingly simple to create, and the legal strategies varied and complex.
It is not uncommon for disputes to escalate into many strategic legal steps by the owners, including strained Operating Agreement interpretations, the interplay and application of statutory provisions, the strategy of early withdrawal, forced expulsion, manufactured concerns with profitability in future years, and the strategic assertion of forced dissolution and liquidation, among other things. On top of those concerns is the governance structure which generally favors the existing management of the company.
One divorce strategy includes the use of a broad provision of the Oregon limited liability statues that provides a court with the power to order judicial dissolution of an LLC if it is not “reasonably practicable to carry on the business” of the LLC. The arguable intent of the language requires more than mere deadlocks and mistrust, since dissolution is an extreme remedy used only as a last resort. However, claims based on this statute, which are really complaints that the owner does not like or trust his or her partner or does not think the company is profitable enough, are easy to make. The effect of the claim is that it puts the owners and business at risk of forced dissolution and liquidation. What dissolution and liquidation looks like depends on who has control and on the unique facts of that situation. More importantly, the claim creates negotiating leverage.
The statutory claim can be used in every LLC in Oregon, even those that are profitable going concerns. For analogy, consider that not every breach of a contract is material, and there is no bright line test to determine materiality. Most in business accept the fact that not all conflicts on contracts are material. Most also accept the fact that not all conflicts or discomfort with business associates require dissolution of the business. Yet, conflicts with business associates are easy to develop and there is a legal strategy to use conflict for personal gain and to put the company at risk.
For lawyers and mediators the skill set required to address business divorces is beyond business governance, as solutions and resolution require skills in statutory dissolution strategies, tax and estate planning, corporate and limited liability dissolution laws, business restructuring, litigation, estate and trusts, real estate, securities, and the skills of a family practitioner to identify personalized issues and solutions. The role of the lawyer is more than litigation. Certainly, litigation may not be avoidable, substantively, or tactically, but in the context of a business divorce, skilled and experienced business lawyers are critical. Whether in mediation or litigation, the business divorce lawyer needs to not only understand the business operations, finances, valuation, and accounting principles, but to understand the people involved, their needs and what is driving their interests.
Complicating the process is the fact that during a business divorce the business continues to operate. The person seeking dissolution and liquidation has no motive to cooperate with his or her business associates, but believes they have every incentive to force conflict. Often, strategic decisions are made for the purpose of poisoning the well and driving resolution further from fruition. Due to the urgency of daily activities, the process can be dynamic and require constant legal involvement. Failure to address issues as they arise can further complicate the ability to affect a resolution that benefits the business. Analysis of strategic positions also requires an understanding of both voting control and operational control. It also requires an understanding of the dissolution and liquidation procedures and processes.
The absence of trust between parties is a great divider, and even more so when one party is motivated to express manufactured outrage and complaints about everyday management, operations, and business decisions. Early mediation can be helpful, but not every party wants early mediation, as that does not give enough time to develop conflicts under the statute. Litigation in this context is often a counterproductive step that is seldom dispositive of the issues but is sometimes necessary to address strategic initiatives and to satisfy the parties on an emotional level.
Understanding these issues and having a knowledge of the disparate legal and business issues is critical to an efficient and effective resolution. Retaining a lawyer who has expertise and experience across these disciplines is critical to leading to a resolution and advising the client in the early stages of the strategies, costs, and options available when a business divorce is looming.