Articles

When Things Go Wrong Can You Avoid a Business Divorce?

By: Gary J. Jaburg

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 business.
  • 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 liabilities companies. 

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