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How to Get a Divorce in a Business Partnership: the Essentials on Legal and Practical Matters to Think About!

The term “business divorce,” the origin of which is unknown, refers to discussions or legal actions undertaken by at least two partners to dissolve their business partnership or their privately owned organization. The scope of the term “business divorce” extends to cover situations in which the owners of a company must part ways for any reason, such as retirement, illness, criminal activity, or liability.

The phrase also takes into account the possibility that one of the business partners might choose to alter the make-up of management. Divorces in the business world may take place in a corporate setting, but they can be just as emotional and unpleasant as divorces between spouses. The reasoning is straightforward. Negotiations between parties who were once extremely close are a common feature of corporate divorces, adding a layer of complexity that can inflame even the most straightforward marital divorces.

Given this reality, attorneys for divorcing business partners must tread carefully to prioritize their clients’ interests over their own feelings during the divorce process. Therefore, this article discusses the rights of business partners in a business divorce and the practicality of litigation to separate a business, as well as the concerns business partners, should keep in mind before and during a business divorce.

When making the decision to part ways with a business partner, entrepreneurs must weigh a variety of factors. The first thing to check is if you can easily and quickly leave the partnership. To this end, the divorcing partners must decide whether or not they will be required to divide the company’s assets (such as its money and property) as part of the divorce settlement.

A business divorce could be made easier if the partners knew going in what assets they each held or were entitled to in the company. Imagine that Partner A did all the groundwork for the business but needed Partner B in order to run and expand it. Partner B could be forced out of the firm with minimal effort if the two parties could come to terms on a separation agreement and a fair settlement.

However, this is contingent on whether or not Partner B has a right to the company’s real or intellectual property and other assets simply by virtue of being an owner or operator of the business. Second, it is critical to identify the business’s assets and the entity or individuals who hold them if a split of assets is to occur as part of the divorce proceedings. Is the firm or one of the partners in charge of owning the company’s tangible assets, such as cars, buildings, computers, and office equipment?

Divorcing partners in a firm should also be aware of the company’s ownership of any intellectual property and the existence of any licensing agreements pertaining to that IP. The partners’ ability to estimate their respective interests in the firm and to guarantee that all relevant assets are considered when the value of the business is evaluated hinges on their familiarity with the business’s assets.

In a similar vein, a person contemplating a business divorce needs to be aware of the company’s liabilities, such as whether or not the company is bound by agreements that must be fulfilled as part of the company’s winddown and whether or not the company’s assets serve as collateral for any loan or line of credit. The corporate divorce strategy could be informed by an early assessment of the company’s assets and liabilities. It makes no sense to spend $400,000 on a court case to divide $300,000 after all debts have been paid.

 

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Third, commercial divorces frequently involve issues of friendship, family, religion, or ethnicity among spouses. Thus, a company owner contemplating a divorce from a joint venture partner needs to take stock of her relationship with the other party and consider how much their respective emotions and worldviews might get in the way of reaching a fair agreement.

What factors, if any, do cultural norms and traditions play into a business partner’s estimation of his just share of the company? If a respected member of the community has an opinion, will it sway the partners’ decisions? A judge’s discretion is preferable to dealing with a business partner who prioritizes cold hard facts over ethics and morals any day of the week. The stress of emotional arguments can impair the judgment of even the most seasoned business professionals, therefore it’s important for a party to realize if it’s in such a scenario.

Before filing for the dissolution of a business, owners should consult an attorney to learn about their legal options. A business owner’s legal counsel should analyze the company’s bylaws, stockholder agreement, limited liability company (“LLC”) agreement, and partnership agreement to determine what those rights are.  This is because the rights of different business entities are different.

Such provisions are common in the governing documents of limited liability companies (LLCs) and partnerships, which permit the dissolution of the entity under specified conditions.  Some governing agreements have buy-sell provisions that let one business partner buy out another, while others specify which liabilities or payment obligations must be met first in the event of the company’s dissolution.

 Business Divorce

LLC agreements can do away with fiduciary duties, making it impossible for a partner to sue another member of the corporation for breach of fiduciary duty.  Also frequent in governing agreements are terms called “forum selection provisions,” which stipulate that any company divorce lawsuit must be brought before a certain court.  In the end, business owners need to know how their rights in a business divorce are affected by the company’s governing documents and whether mediation, litigation, or some other approach is the appropriate course of action.

The study must take into account the effect of applicable state statutes and case law on business divorce and the division of assets. For instance, dissolving a business can be done voluntarily or involuntarily, and each state has its own set of rules for doing so. In the state of Delaware, for example, a company can be dissolved in court only if it is owned equally by two stockholders and one of those stockholders files for dissolution.

Apart from that, there is no legal mechanism in Delaware legislation enabling the involuntary dissolution of a corporation.  If a Delaware partnership or LLC wants to dissolve, it has more statutory options to do so. Although courts “sparingly” grant a judicial dissolution of LLCs, both partnerships and LLCs can be dissolved “whenever it is not reasonably practical to continue on the business” in accordance with the applicable partnership or LLC agreement.

It is the job of the courts to “determine the business of the partnership and the general partner’s ability to achieve that purpose in conformity with the partnership agreement” when deciding whether or not it is feasible for a partnership to carry on its business.  LLC agreements are often assessed using the same rules that courts use to determine if it is reasonable for a partnership to operate.

 Business Divorce

When a company’s leaders are unable to reach a consensus on a major business decision, or when the company’s stated mission has been achieved or is impractical to implement, courts often rule that continuing the business is no longer feasible. Furthermore, remedies for commercial divorce-related issues arise under state law, therefore it is vital for an entrepreneur to be informed of (or engage counsel who is aware of) state law.

A party shouldn’t have to spend a lot of money on litigation just to find out that the remedies they want aren’t available or aren’t as beneficial as they’d hoped. A corporate divorce should be settled amicably wherever possible, through negotiation, mediation, or any other means short of going to court. It is generally agreed that settling a corporate divorce outside of court can shorten the process, saving money, time, and stress for the company’s owners.

If both parties in a business divorce agree that litigation is necessary, there are several groundwork procedures that must be completed. Before anything else can happen, each side needs to settle on what it wants and how it wants to get there, be it a clean breakup or a reworked working relationship. The second step in a business divorce is for the parties to determine the evidence that will support their respective positions.

Waste, misuse of business chances or funds, failure of board monitoring, and minority oppression are all grounds for fiduciary duty claims, but each requires proof based on a unique set of circumstances. A business owner has to think about the time it will take to navigate a business divorce via litigation in addition to the claims that may be supported by the available facts.

Depending on the case complexity and the number of attorneys involved, a corporate divorce in Delaware could take anywhere from six months to nine months. Delaware courts often schedule trial dates 12-18 months after a divorce petition is filed in a disputed business divorce. If a corporate divorce dispute is causing a disruption in operations, it is important to think about how long it will take for the case to be resolved.

Finally, the cost of litigation should not be underestimated by any company partner who is considering suing for a corporate divorce. Legal bills for an uncontested business divorce might still reach six figures. Legal bills during a contentious corporate divorce can cost $700,000 to $1 million for each party.

Therefore, a business owner should consider the available resources before deciding to apply for a business divorce lawsuit. The worth of the company at issue in the divorce should play a pivotal role in the calculation. Litigation budgets should be monitored closely in corporate divorce disputes due to the emotional aspect of the case, which can result in overspending if the parties are driven to make decisions based on their emotions rather than their strategy.

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