Butting Heads with Your Business Partner?

Death and taxes have long been said to be the only two unavoidable things in life. But in our modern day and age, divorce is running a close second. And messy domestic divorce situations aren’t the only divorces of the 21st century. Business divorces are challenging individuals and their attorneys, when partnerships and closely held business entities go south. What are your rights, and how do you salvage a business that has been your primary investment of a lifetime?

The first issue is what is the form of ownership? A sole proprietorship, a partnership, a corporation or other limited liability form of ownership? What are the controlling documents? What is the nature of the dispute? And what are the objectives of termination? Liquidation? Bankruptcy? Or a buy out?

We have received more than a few phone calls from someone with ownership in a small business who has found himself or herself in a business relationship that is troubled, like a bad marriage. Perhaps the partner is not doing his or her fair share. Perhaps the partner has chemical dependence issues (drugs and/or alcohol), mental health issues, or a host of other problems that can affect the viability of a business. Sometime the problem is theft, or stealing business opportunities (known as “usurpation”). In any situation, we will want to investigate both the dynamics and formation of the business.

A sole proprietorship is a wholly owned business entity where assets, liabilities, and good will rest in a single individual. Such an entity does not require a winding down, and may be sold or terminated at the will of the owner.

Partnerships, however, are more complicated and include a fiduciary duty of good faith and fair dealing between individuals. The Texas Partnership Act, provides for notice and termination of partnership activities. This includes disposing of assets and liabilities. If a sale is desired, a suit for partition may be appropriate. We often request the appointment of a receiver, an accounting, and evaluation of partnership assets as part of this process. While this is complication, we typically maximize return or investment for our clients. In one recent case, we increased a buyout offer for our client fivefold.

The third, and most complicated business forms of ownership are professional corporations, limited liability partnerships, and limited liability companies. These forms of legal entities are typically controlled by agreements and bylaws that spell out under what circumstances the business may be terminated and the procedures to be followed when termination is invoked by an owner. It is extremely important to have counsel review the formative documents, and assist in preparing the necessary documents, as additional financial penalties and expenses may be associated with disregarding the written provisions of these entities.

Our firm typically notifies the other party of our client’s intent to terminate the form of business, citing specific wrongdoing, including but not limited to fraud, misrepresentation, breach of fiduciary duties, conversion (theft), and usurpation of economic opportunities or assets. We often seek immediate relief from the courts without notice, and obtain a temporary restraining order to freeze corporate assets, and request the appointment of a receiver.

If you are facing, or contemplating, a business divorce, call our office today. We will be happy to discuss your options and outline a proposed plan going forward. The first call is always free.