Business divorces occur when the shareholders or co-owners in a privately held business must dissolve their relationship, including the complex financial and legal ties that complicate the process. Business divorces also involve numerous stakeholders, complex business operations, and the lives of many people who depend on those operations for their livelihood.
During this process, majority and minority stakeholders must understand their legal rights and obligations to achieve a result that is in the best interest of themselves and the company.
This guide provides an overview of those duties to help businesses manage the divorce process as effectively as possible.
What is a Business Divorce?
Business divorce can occur for numerous reasons, including a stakeholder’s retirement, criminal action, sickness, or death. However, the most complex business divorces are those that occur due to operational, financial, or legal disputes.
Disagreements about growth, security, investments, operations, and more can lead to business divorces. These differences in vision can result in a buyout or change in leadership, but they can also result in the sale or dissolution of the business.
Key Legal Rights in a Business Divorce
Before the divorce process has been officially initiated, business owners should perform a comprehensive review of their legal rights. These differ based on the business type, making a consultation with a firm experienced in business divorce proceedings imperative.
- Ownership Rights: In the event of a dissolution or sale, the owner’s interest will determine their ownership rights over the divided assets.
- Contractual Rights: Existing agreements, such as shareholder agreements and operating agreements are required elements for understanding the pre- and post-divorce processes. Buy-sell agreements, voting rights, and more are dictated in these documents.
- Valuation Rights: An impartial evaluation of the total value of a business’s assets is critical to negotiating an agreeable buyout or sale between all relevant stakeholders.
- Intellectual Property Rights: Intellectual property, including patents, copyrights, trademarks, and knowledge of business operations, should factor into the valuation and division of assets.
Legal Obligations You Must Fulfill
In addition to legal rights, business owners also have legal obligations to fulfill during the divorce process, including a responsibility to act in the best interest of the business and an obligation to review and abide by legal contracts and stakeholder agreements during the divorce process. These are known as their “fiduciary duty” and “contractual obligation,” respectively.
Other duties include those to the business’ employees, including fairly assessing their benefits, paying severance, and enforcing non-compete agreements. Stakeholders must also assess their tax obligations, including the implications of capital gains taxes on divided or dissolved business assets.
Steps to Protect Your Rights During a Business Divorce
Despite the complex implications of business divorces, business owners can follow simple steps to protect their rights while fulfilling their obligations:
- Hire Legal Counsel: A firm experienced with the rights and obligations of relevant parties during a business divorce can offer professional guidance to make the negotiation process more efficient and prevent litigation.
- Obtain an Impartial Valuation: A third-party business valuation guarantees that assets are recorded fairly, helping majority and minority stakeholders protect their financial interests.
- Prepare for Negotiation and Litigation: While business divorces can be resolved with professional negotiation, litigation may become inevitable in extenuating circumstances. Stakeholders should use their professional counsel to prepare for both events to protect their rights in either case.
Common Challenges in a Business Divorce
The business divorce process is intricate, frequently leading to challenging negotiations, including:
- Disagreements over valuation methods
- Conflict over intellectual property ownership
- Disputes regarding employee retention and benefits
- Conflicting interests during a buyout, sale, or dissolution in cases with no clear majority owner
- Disputes over post-divorce legal obligations
- Agreements over who remains with the company and who leaves the company
Experienced counsel can help owners overcome these challenges to better protect their financial rights throughout the divorce process.
Mediation and Alternative Dispute Resolution (ADR) as an Option
There are instances in which a business divorce can be better resolved through mediation and alternative dispute resolution (ADR). However, to avoid possible legal and financial mistakes, this should be considered under the advice of an attorney.
ADR methods can help stakeholders maintain their professional relationships post-divorce by facilitating amicable resolutions to some of the common challenges listed above. Speak with an attorney about the possibility of mediation for your situation and enlist their guidance in formulating or accepting any terms under ADR.
Trust your Rights and Responsibilities to KPPB LAW
For business owners, business divorces represent a fundamental change in the operational, financial, and legal status of the business. Understanding your rights and obligations during this process is key to achieving amicable negotiations before, during, and after the divorce.
Both majority and minority stakeholders can seek professional legal counsel to better understand and respond to the complexities of the divorce process. Their services include professional valuations, mediation, contract review, and more.
Contact the KPPB LAW team to schedule a consultation and learn how an experienced firm can defend your rights during the complicated divorce process.