Legal Blog

The Business Divorce

Over the years, I have often been called upon to represent business owners who for one reason or another have come to the point where they need to end their relationship with the co-owner of their business. Whether the relationship is in the form of partnership, corporation or limited liability company, the approach to be adopted is basically the same. These type matters are often termed “business divorces”. At the end of the day, it is the lawyer’s job to strategize so that the client is treated fairly and ends up with the ability to continue his/her career or is paid enough money for his/her share of the business. The tactics to achieve this goal are, of course, critical. I have successfully pursued dozens of these matters for a variety of businessmen including dentists, lawyers, physicians, a communications company, restaurateur, distribution company, construction company, auto dealership and a beer and wine distributorship.

The problem with these cases to start with is that there may well be no right for one owner to demand to be bought out by the other. For instance, two lawyers who had been partners for 48 years surprisingly decided they could not stand the sight of each other. But who would take over the clients, the offices, the personnel? Neither had the right simply to oust the other. Claiming deadlock and going for a judicial dissolution would take too long and cede control of the outcome to the vagaries of the court system. A wife and husband have an array of statutes and precedents to rely upon in working out their separation. But co-owners of a business have no counterpart to govern their “divorce”. The unhappy partner can simply walk out, but risks losing everything in doing so. For instance, the unhappy co-owner of a steel fabrication company cannot simply walk away and start his own warehouse and manufacturing facility without freeing up the capital he has tied up in his current business.

The first step for the attorney representing one of the owners is to identify what rights are given to the owner by existing law. For instance, in a corporate form, there are statutory rights to annual meetings (F.S. §607.0701), shareholder votes (F.S. §607.0721) and periodic  accounting statements (F.S. §607.1620). Often, in closely held companies these rights have been ignored for years and beg to be enforced. Often, a violation of a shareholder’s rights can be triggered by a broad, comprehensive request to examine corporate records under F.S. §607.1602. Certain corporate records must be maintained (F.S. §607.1601). There are similar statutory requirements for partnerships (e.g. F.S. §620.8403) and LLC’s (e.g. F.S. §605.0410). There may be rights created by a shareholder or partnership agreement and in an LLC there are rights created by the operating agreement. In all business entities, each owner is protected by his counterpart’s fiduciary duty not to “steal” or to act selfishly in derogation of the benefits accorded to the other owners. E.g. Biltmore Motor Corp. v. Roque, 291 So.2d 114, 115 (Fla. 3d DCA 1974)(corporate seing) McCoy v. Durden, Case No. 1D13-2113, (1st Fla. DCA December 31, 2014).

The second step is to identify the ways in which these rights have been violated. As noted above, there may be a lack of conformance to a corporate statutory requirement such as an annual meeting or annual financial statement. Denial of such rights creates a perfect platform for equitable relief i.e. the continuing denial of the right to vote. Other events that provide an entree to seek relief include usurping a corporate opportunity to engage in a related business or expand into another territory; excess compensation or the employment of relatives, discharge of the unhappy plaintiff/owner, spending company funds on personal matters, or failure to distribute the funds necessary to pay taxes on K-1 income. Each of these wrongs and countless others could be the subject of a separate article, but for present purposes suffice it to say that the lawyer must apply imagination, creativity and original thinking to identify the ways in which his/her client has been mistreated.

The third step is to fashion a legal claim based on the right that has been denied that will result in the outcome needed – usually an agreed buy-out or division of the business. This is an outcome that no law suit can provide. There is no prayer in a complaint saying “Wherefore the plaintiff seeks a buyout.” We are accustomed to suing for damages, but that type of litigation can take many months if not years and in the end will not necessarily achieve the desired outcome. A judicial dissolution is also insufficient as there the likely outcome is a liquidation of the business or in other words the denial of the valued business to both litigants. However, the expense and inconvenience associated with litigation are such that a well-timed lawsuit can encourage a settlement that achieves the desired outcome quickly — In other words not a hollow court victory, but a negotiated resolution that wins the plaintiff either the buy-out or the division of the company that is needed as a practical matter.

A temporary restraining order or temporary injunction is the best bet to force the defendant to the negotiating table. To file such a claim, however, the cause of action must be one that meets the criteria for injunctive relief. Fla. Rule of Civ. Pro. 1.610. For instance irreparable harm arises when one is excluded from corporate governance or is denied a statutory right. The threat of repeated wrongs into the future can be argued to mean there is no adequate remedy at law because the amount of future damage is currently unquantifiable. The expansion of the business or improper contact with new customers cannot be expressed in dollars and cents because of the immeasurable long term effects. Whatever openings the facts of a particular case present, it is essential to frame the cause of action in a way that justifies a claim for equitable relief on an emergency basis.

Once the valid cause of action is established, expedited discovery necessitated by the shortened time frame of a claim for emergency relief which requires the defendant to respond very quickly and also admit the validity of the plaintiff’s factual allegations naturally creates incentive to compromise. The idea is create the opportunity to appear in front of a judge as soon as possible for a substantive ruling that puts the defendant at risk. The threat of that ruling is the tool to bring the defendant to the conclusion that a settlement is the preferable outcome.

The foregoing recipe for assisting a mistreated minority shareholder (minority in the sense of lacking control) is meant to achieve a quick and fair settlement. But the client must be made aware early on that if Defendant refuses to settle and the emergency relief is denied without a settlement, then the litigation will go on to a natural conclusion. Time and money will be spent in the process. Also, the reader should NOT take away from this article that any frivolous claim should be made for the sake of harassing a defendant into a settlement. All the claims must be grounded in fact and couched in meritorious legal principles.

At the end of the day, it is the lawyer’s job to assist a client who’s rights and property interests have been damaged by his business partner’s actions to the extent that he no longer wishes to remain a business partner. That assistance may focus on the actual reasons for the client’s unhappiness but may also require that other reasons for action be pursued that ultimately will bring about the desired result.

By: Mark B. Cohn, Esq.

Of Counsel, The Boatman Law Firm

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THIS BLOG IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. IT DOES NOT CONSTITUTE LEGAL ADVICE. THE READER SHOULD CONSULT WITH KNOWLEDGEABLE LEGAL COUNSEL TO DETERMINE HOW APPLICABLE LAWS APPLY TO SPECIFIC FACTS AND SITUATIONS. BLOG POSTS ARE BASED ON THE MOST CURRENT INFORMATION AT THE TIME THEY ARE WRITTEN. SINCE IT IS POSSIBLE THAT THE LAWS OR OTHER CIRCUMSTANCES MAY HAVE CHANGED SINCE PUBLICATION, PLEASE CALL US TO DISCUSS ANY ACTION YOU MAY BE CONSIDERING AS A RESULT OF READING THIS BLOG.
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