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Home / Firm Blog / Business Law / What You Need to Know About "Business Divorce"

What You Need to Know About "Business Divorce"

It's stormy seas for businesses that neglect “divorce-proofing” shareholder agreements, according to a recent WealthCounsel article. Disputes that arise between business partners can become just as financially and emotionally draining as family law divorce.

"Litigation between business partners, sometimes termed “business divorces,” can be as ugly, contested, high-stake, costly, and emotionally taxing as family law divorces. These disputes commonly occur between partners regarding governance, valuation, and fiduciary duties, among others. Shareholder agreements (or operating agreements for LLCs) serve as the business partners’ prenuptial agreement, creating foresight and certainty for all parties in the event that the business marriage goes sour. Although not guaranteed, shareholder agreements will help partners keep the emotion out of a business divorce when a dispute arises. In such a situation, it is helpful to have a “rulebook” that everyone signed onto at the outset of the business. Shareholder agreements serve many functions, in addition to the standard buy-sell clauses (which are often poorly drafted). For example, shareholder and operating agreements should clarify management issues and contain dispute resolution devices such as clauses to resolve “deadlock.” In sum, these agreements delineate powers, rights, and duties of management and ownership, leaving little gap for litigation to fill.

Business owners should execute shareholder agreements at a corporation’s inception. States do not require partners to execute such agreements to form their companies. Many partners also ignore their importance because of legal costs associated with drafting. This can be a disastrous decision months or years later if and when the partners no longer get along.

Shareholder agreements generally apply even if they contradict state law. In the absence of an agreement, state law (statutory and common law) will direct resolution."

Check out the WealthCounsel link below for more.

Categories: Business Law

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