Like all human relationships, business partnerships have their ups and downs. When things go well, everyone is happy and business is usually booming. However, when things don’t go well, even small disagreements can lead to big disputes, and business will often suffer as a result. What should formerly happy business partners do when they find themselves in an unhappy cycle of persistent and seemingly insoluble disputes with one another?
There are several resolution options available:
1) Mediation. With the help of a neutral, external mediator, business partners who want to stay in business together can deal with communication difficulties and differences of opinion about the nature of their business and their relationship. An objective mediator can facilitate healthy communication and decision-making between business partners in order to set them on the path to a stronger partnership. Mediation is often a cost-effective way of recognizing and overcoming negative communication cycles, defining goals and responsibilities and agreeing to a jointly developed solution.
2) buy-out. If business partners have come to the conclusion that they really can no longer work together, but still want to run the business themselves, there is a possibility that one or more of them will be bought up by their other partners. If a sales and purchase agreement was entered into when the partnership was formed, the parties should follow the procedures set out in this document. In the absence of a buy-sell agreement, often the first step is to conduct a valuation of the business so that the parties understand what their interests are worth. It must then be negotiated who will be bought out and under what conditions the buyout will take place. Involving a legal counsel in negotiating and executing such a buyout is critical.
3) Sale to new owners. Sometimes it turns out that none of the business partners want to stay in business even if the business is still viable. In this situation, it can make sense to look for a buyer who will buy the shares of all shareholders in the company. Buyers can be found among existing employees, competitors, or through business brokers. Again, an up-to-date assessment of the company should be obtained and hiring a legal advisor to assist with the transaction is important.
4) Freeze-out merger. In situations where the interests of the business partnership are not alike, majority owners can “freeze” minority owners through a merger with a newly formed company owned by the majority owner. In this situation, the minority owners are forced out of ownership, but a fair market value is paid for their interests. Freeze-out mergers are governed by law and court precedents. It is necessary to use the services of a commercial lawyer who is experienced in conducting such transactions.
5) Dissolution – voluntarily or judicially. In certain circumstances it will turn out that saving the business and the relationship is simply not feasible and dissolving the corporation is the preferred route. If the parties can agree to voluntarily dissolve the company, it can be as simple as filing the required documentation with the state, paying off the creditors, selling the remaining assets, and distributing the proceeds according to the company’s shares. But sometimes even an agreement on dissolution is impossible and it is necessary to seek judicial help. The law allows the judicial dissolution of a company by filing a lawsuit. When a judicial dissolution occurs, the parties lose control of the dissolution process and simply have to abide by the judge’s decisions.
6) bankruptcy. Not surprisingly, disputes between business partners often arise due to the poor financial circumstances of their company. When a company’s liabilities exceed its assets, it is insolvent. Rather than continuing to indulge in debt, which is likely to keep growing, a bankrupt company may find that filing for bankruptcy is the best option. In some situations, bankruptcy allows the company to restructure its debt and move on. In other cases, liquidating the company entirely may be the only option. In any case, hiring a reputable and experienced bankruptcy attorney is required to cope with the complexity of bankruptcy law.
7) Litigation. Occasionally, disputes between partners result from misconduct by one or more of them. Fiduciary violations, misappropriation of assets, fraud, and failure to meet obligations and responsibilities are just a few of the scenarios that can lead to litigation between business partners. The filing of a lawsuit against business partners who have violated their obligations to their other partners and / or the company can lead to an award of financial losses to the injured party. An experienced litigator should be consulted to analyze potential claims and file such lawsuits.
© 2021 Davis | Külthau, sc All rights reservedNational Law Review, Volume XI, Number 152