Mar 09, 2017

Business divorce

What is business divorce?

All owners of businesses will eventually separate from the company. In many instances there are properly drawn documents for an owner to have their interest sold to another shareholder or redeemed by the company. This article, however, addresses what happens when there is a “dispute” on how a business interest will be separated. No matter how sophisticated corporate documents are drawn, the emotions of the individual owners may create business and personal conflicts on how a business should be operated.

Process for resolution

If shareholders are in dispute and wish to separate their business interest, each party needs to select an attorney to represent their best interests. The existing attorney who represents the entity cannot represent one shareholder against the other—that would be a considered a conflict of interest—unless the other shareholder(s) voluntarily waives a conflict.

When representing a shareholder(s), the attorney determines the following major categories which will define the ultimate goal. (a) What does the client need (must have) to do the deal? (b) What does the shareholder want (but does not necessarily need to have)? (c) What issues can be discussed which may be critical to the other side but not essential or necessary for the shareholder?

After determining those categories the attorney meets with the other attorney to develop a Term Sheet. Shareholders need not spend countless hours and legal fees drafting numerous documents that the parties may never agree upon. The Term Sheet will discuss, among other items, (a) the valuation of the business(es), (b) the structure of the transaction(s) and (c) tax consequences for all parties. After the valuation is determined, the structure and tax consequence are finalized and documents are drafted.

Final agreement

It is critical to understand the personalities and goals of the other parties. A successful business divorce is when all parties are able to achieve what they “need” so that they can move forward on their business activities rather than spend countless hours arguing in court. Therefore, it is beneficial and cost effective to maintain civility during the process.

If you are contemplating or actively seeking a separation from a company, contact one of the corporate transactions and business law attorneys who will protect your interests.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Terrell J. Isselhard, Principal

This alert originally appeared in the Spring 2017 Corporate Focus newsletter.