By the time a business reaches the point of a business divorce, relationships may already be broken, resulting in poor decisions. If not conducted correctly, the actions of the divorcing co-owners can negatively impact operations.
The continued presence of co-owners who refuse to leave can disrupt production, delay financial progress, and lead the business toward costly litigation. The longer the divorce process lasts, the more difficult it will be for the remaining employees to resume normal operations and repair the business’s reputation.
Co-owners have legal rights and options during a business divorce. Below, we review these options, including strategies for dealing with uncooperative co-owners during business divorce proceedings. The primary goal is to help the remaining owners protect their interests and secure the reputation of the business against future litigation.
Common Reasons Co-Owners Refuse to Leave
Involving numerous financial, personal, and legal actions, a business divorce is multi-faceted, providing a multitude of reasons why a co-owner would refuse to leave despite negotiations:
- Fear of Financial Instability: Co-owners may not want to leave by choice due to their stake in the business. Their departure may lead to financial insecurity, a loss of assets, and potential legal action. By refusing to leave the business, co-owners may be attempting to maintain their current financial status.
- Dispute Over Valuation: Asset valuation is a vital aspect of successful business divorce proceedings. Accurate valuation allows co-owners to discuss buyout terms and ensure a fair outcome based on contractual agreements. If one of the owners disputes the methods or results of the valuation, they may refuse to leave until they achieve a settlement they perceive to be fair.
- Control and Influence Concerns: While operating agreements govern issues of control, interest, and ownership, a business divorce can alter a co-owner’s status and potentially dissolve their relationship with the business entirely. Co-owners who refuse to leave often attempt to retain their control to consolidate their interests or negotiate better terms.
- Unclear Legal Agreements: Clear agreements for operations, stakeholders, and other legal areas are essential for successful business co-ownership. In their absence, many businesses endure prolonged or unsuccessful divorce negotiations as co-owners and legal representatives dispute the terms of these agreements and how each party’s interpretation will impact the results. Many co-owners take advantage of unclear legal terms to prolong the divorce process to their benefit.
Notably, not all co-owners who refuse to leave act out of choice. Many feel they do not have the financial ability to leave the business and can provide legitimate reasons why they should stay. In that case, the remaining owners may restructure roles to minimize the conflict or more clearly define the boundaries of decision-making that will govern the exit terms
Regardless of the legitimacy of their reasons, co-owners who refuse to leave threaten the security and operations of the business. The remaining owners must have strategies in place to respond to this possibility with all legal options available, starting with reviewing their existing agreements.
1. Review Agreements and Legal Framework
Business divorces proceed based on arrangements made in several key legal agreements, including:
Operational agreements- Shareholder agreements
- Buy-sell agreements
These agreements determine the outcome of business divorces by dictating the conditions under which shares can be bought or sold, the responsibilities of co-owners during the divorce, the legal rights of majority and minority stakeholders, and more.
Additionally, state laws can determine buyout conditions and enforce the responsibilities of co-owners during and after the proceedings. All documents with legal influence over the trajectory of the business should be reviewed to avoid complications and set clear legal boundaries during the divorce.
2. Negotiate Terms of Exit
In many cases, co-owners can resolve disputes through direct negotiation and avoid costly litigation. When openly discussing exit terms and valuation strategies, owners should focus on fair market valuations and mutually agreed-upon terms to arrive at acceptable conclusions for all relevant parties. In the negotiation process, third-party asset valuations play a major role in guaranteeing the objectivity of the negotiations.
3. Mediate Using an Impartial Third-Party
Direct negotiations often stall due to inexperience in business divorce proceedings or a co-owner’s continued refusal to compromise. In that case, mediation can provide a structured approach through a neutral third party.
Reviewing relevant documents and terms can facilitate the discussion and help co-owners reach viable solutions to their dispute. Mediation is often less adversarial than litigation and plays a key role in disputes wherein the co-owners hope to preserve a working relationship after the divorce.
4. Legally Dissolve the Business
Irreconcilable disputes may result in a need to dissolve or partition the business between the remaining owners. Legal dissolution entails dividing assets and terminating the business entity to end the conflict. This process requires careful financial and legal planning to make sure the assets and liabilities are distributed fairly.
5. Use Well-Planned Litigation to End the Dispute
Many business divorces with co-owners who refuse to leave cannot be resolved without litigation. When properly prepared, litigation provides a path forward for the remaining co-owners to enforce their contractual rights, compel a legal buyout, or dissolve the business to the mutual advantage of the remaining parties.
Litigation establishes a finalized legal resolution, making it the most expensive and time-consuming option to resolve a business divorce. This is why so many businesses rely on the expert guidance of business divorce lawyers to mitigate the costs of litigation and help ensure the results are satisfactory for the remaining co-owners.
While many disputes can be prevented in advance, such as by drafting explicit exit strategies and maintaining updated agreements and resolution roadmaps, many disputes resort to litigation due to a co-owner’s refusal to accept the legal terms of their exit. In these cases, the remaining employees require the services of an experienced business divorce firm to resolve their dispute while minimizing the financial and operational damage.
Contact KPPB LAW for Expert Guidance in Business Divorce
A business divorce requires experience and a clear strategy. Expert business litigation attorneys understand the negotiation process, including the steps of mediation and arbitration that can resolve complex divorces without further damaging the business’s reputation or operational status.
Contact KPPB LAW today to schedule a confidential consultation with expert attorneys to create a strategic plan for conflict resolution when a co-owner refuses to leave during business divorce proceedings.