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When Things Go Wrong can You Avoid a Business Divorce?
When Things Go Wrong Can You Avoid a Business Divorce?
By: Gary J.
As is the case with some marriages, business partners may also
decide they no longer want to be together. Many of the same
dynamics are in play whether a couple is facing a marital divorce
or partners are navigating a business divorce. The trust between
the partners is typically in short supply and each partner is
focusing on maximizing their own return - which may not be in the
business' best interest.
How, and if, the business emerges from the company divorce is
determined by four key issues which drive a partner's options and
strategies in the business divorce:
- The business is owned equally - meaning each partner holds 50%
- AND there is no Shareholder or Operating Agreement that
adequately addresses their issues.
- The value of each of the partners to the business and their
relationship with key customers, employees and/or vendors.
- The financial strength of each of the partners and the
- One partner(s) has a controlling interest and the other
partner(s) has a minority interest.
The mixture of these factors creates an endless variety of
potential scenarios and strategies for how the business divorce
plays out. Further complicating the partners' options are a number
of legal principles.
- Voting control of entity. The majority owner,
absent a Shareholder or Operating Agreement provision to the
contrary, has the right to effectively control virtually all
aspects of the business. This includes the right to hire and fire;
compensation for all employees; and distribution of profits. A
common misunderstanding of business owners is that profits must be
distributed in accordance with ownership percentage. A majority
owner can hold as little as 51% of the company.
- Minority shareholder rights. Arizona Revised
Statutes and common law provide certain rights for minority
shareholders and certain responsibilities for all owners. The law
provides that all owners owe a fiduciary duty to other owners.
- Arizona statutes controlling "business divorce".
Absent a Shareholder or Operating Agreement that specifically deals
with an issue, Arizona Revised Statutes and common law dictate
certain rights and responsibilities of owners in a business or
corporate divorce context. A.R.S. § 10-120 et. seq. controls
corporations and A.R.S. § 29-601, et. seq. controls limited
In a business divorce, much like a personal divorce, it is
essential that the parties understand their rights and
responsibilities in order to develop options and strategies for not
only resolving their situation but also to protect the viability of
the business. The sooner an owner obtains this information the
better able they are to - hopefully - mend fences and continue the
business relationship. Or, in the alternative, determine that
continuing the business relationship is not feasible and start
business divorce with the goal of avoiding an ugly business divorce
and keeping the business operational.
About the author: Gary Jaburg is the managing partner
and founder of Jaburg Wilk. He frequently works with
clients to help them structure their company to
minimize future problems as well as representing clients that
are getting a business divorce.
3200 North Central Avenue
. Phoenix . Arizona