Economic downturns often lead the owners of privately held companies to go their separate ways. In a perfect setting, the parties would execute a fair and civilized splitting of assets and resources â either by dividing the company equally or by having one party buy out the other â and then ride off into the sunset with their friendship, egos and fortunes intact.
At the other extreme, years, if not decades, of animosity may culminate in a hostile breakup of the company, where reaching a workable resolution is nothing short of miraculous, Ã la War of the Roses. Regardless of the cause of the irreconcilable differences, the breakup process may quickly come to resemble a divorce.
Is there a prenuptial agreement? Well-advised business owners invest time and money at the start of their relationship to reach a buy-sell agreement, also called a shareholder agreement, that memorializes how the business will be split up if one party wants out.
The typical triggering events are the "Four Ds" - death, disability, disagreement, or a personal divorce of one of the owners. An effective buy-sell agreement clearly identifies, among other things, all of the potential triggering events and sets out the procedure for paying, and, more important, pricing the bought-out interest.
When a buy-sell agreement is lacking or outdated, the parties have to work out a settlement, which can be difficult if they do not get along. The only obvious options are to negotiate, or, if all else fails, dissolve the company voluntarily or involuntarily under state corporate or partnership law.
How do you value the buyout? Without an effective buy-sell agreement, the parties have to negotiate a price that they jointly consider realistic and relatively accurate - or, at a minimum, relatively fair.
Usually the business owners are best suited to value the company, with advice from the company's accountants, though they can also seek third-party appraisers or other industry experts. Valuation is complex and involves weighing all factors that impact the company's bottom line, including current and future revenues and liabilities.
Additionally, the parties need to assess the tax consequences of any proposed resolution to the company, the departing owner and the remaining owner.
If you're leaving, what can you take without consent? The short answer is not much. All property used in the business belongs to the company, except items purchased by an owner with personal funds. The company owns all tangible property that a partner uses for business or pleasure if corporate funds were used, such as PDAs and computers (and jewelry and other expensive gifts, which were discovered after the fact in one dispute I negotiated). Business opportunities arising before a partner's departure generally belong to the company, and failure to report those opportunities can lead to fiduciary breach claims.
If you are the remaining owner, how do you preserve the company? The remaining owners need to swiftly develop a plan to preserve the company's value and retain key employees, assets, clients and contracts. They also need a back-up plan to address potential scenarios where one or more of these "key value factors" go with the departing partners.
When and what can you tell your team and staff? In an ideal world, the owners would reach a quick and amicable resolution, then tell their team jointly. In the real world, however, one side often has packed their bags and headed out the door. This forces the remaining partners to scramble to retain key talent and develop a thoughtful communication plan.
Fiduciary duties under California law prohibit officers, directors, partners and majority shareholders from soliciting other employees, owners and clients, prior to such fiduciaries' resignation and termination. Often, express non-solicitation covenants may apply.
When can the parties start dating? Most states enforce non-competition covenants if they are reasonable. In contrast, California finds most noncompetes unenforceable unless the terms fit squarely within one of the statutory exceptions.
Additionally, any overly broad or overreaching covenants that do not comply with California law can be struck. Also, individuals who are "owners" in name only and are more like employees arguably could challenge the "partner/shareholder/owner" classification as a "sham" and void the restrictive covenants.
Can the parties walk away with a clean slate, letting bygones be bygones? Any resolution needs to involve a discussion of a mutual general release. In a general release, the releasing party waives all claims, whether known or unknown. The mutuality aspect means that the releases run both ways. The benefit of a mutual general release is that it allows parties to go their separate ways, with a clean slate and without having to worry about being sued. However, depending on the facts, a general release might not be appropriate.
How do you announce the change to the outside world? Ideally, the parties would agree at the start of negotiations to keep the break-up, negotiations and all terms confidential until they sign a written settlement agreement, and then, once they reach a resolution, they would jointly draft a public announcement. The parties also should consider including a non-disparagement covenant in their settlement agreement.
Keeping your cool. Breaking up is hard, and business divorces are no exception. Usually companies break up because of money - not enough or too much - and souring relationships - one party thinks that they contribute more than their fair share or that the other parties are too lazy, arrogant, ungrateful, etc.
How much will this cost? Unraveling business ties takes more time and money than most owners anticipate. If the parties fail to reach a quick deal, costs and time easily can be five to 10 times more than that needed to prepare a buy-sell agreement at the start.
Cara Lowe is a corporate partner and managing partner at San Francisco-based law firm Stein & Lubin LLP. Her general business practice focuses on complex commercial transactions. Reach her at at email@example.com.
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