“I’ve about had it!” yelled Diane at her business partner of 10 years. “I don’t think I can trust you anymore. First you take extra money out of the business without communicating with me which was our agreement. For the last few months you haven’t been putting in any time and effort. I’ve been making the sales and directing the employees. And now because you don’t know a lot of what’s going on, you’ve botched up a relationship with a great client.”
Ted her partner replied, “Well you know that I put in more money than you to get this thing started, so I should be able to take money when I want and keep my schedule as flexible as I want.”
Diane glared at her partner. “We addressed that in our shareholder agreement. I know I’m the minority partner, but that doesn’t mean you can walk all over me and not keep the other promises we made to each other.”
So the arguments increase as partners who started out in alignment with one another’s goals, values, work ethics, and motivations have now have drifted apart. As the minority shareholder what can Diane do?
Richard Lambert and Jeri Quinn are co-founders of The Business Divorce Institute which addresses this question. Jeri asks Richard these questions that might help Diane make some decisions.
Jeri: With apologies to Neil Sedaka, is breaking up (a business partnership) hard to do?
Richard: It’s harder than divorcing a spouse, but easier than many business owners think it is.
Jeri: Why is that?
Richard: In business divorce cases, unlike matrimonial divorce, there’s no such thing as a no-fault divorce. Neither Diane nor Ted can just walk into Court and request a “business divorce”. In this case either Ted or Diane would need to file a case for “involuntary dissolution” of the corporation.
Jeri: Isn’t that essentially the same as dissolving a marriage in a matrimonial case?
Richard: No, because the shareholder asking for dissolution must show a basis for a court-ordered dissolution. There are three grounds for dissolution in the New Jersey Oppressed Minority Shareholder Act, but the one that we most often see invoked in the case of a corporation having 25 or fewer shareholders is (to quote the statute) “the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees”.
Jeri: That’s a mouthful! But do I understand correctly that the protections of the statute extend only to “minority shareholders” like Diane?
Richard: Yes, but any owner holding 50% or less will qualify as a minority owner.
Jeri: Ok, but it seems like it would be difficult for Diane to satisfy the requirements of this law.
Richard: You might be surprised to learn that, in our practice, most minority shareholders like Diane who consult with us qualify for the protections of the law.
Jeri: But doesn’t “dissolution” involve the shutting down of the business? Wouldn’t that be economically wasteful if the business were a going concern?
Richard: I have two responses to that. First, it is threat of dissolution, or mutually assured destruction, that brings both parties like Diane and Ted to the negotiating table, seeking a negotiated resolution of whatever problems are going on inside the business. Second, the Court is not required to dissolve the corporation. If the Court considers it fair and equitable to all parties under all circumstances of the case, the Court may order one of the shareholders to sell to the other shareholder(s) at a fair price.
Jeri: I see, so it’s the threat of dissolution that gets the parties to settle.
Richard: Exactly. And not only that, the whole judicial process in New Jersey is geared to forcing the parties to a settlement. In most cases, the Court orders that the parties submit to mediation with a third-party neutral. That’s why 98% of these commercial cases settle.
Jeri: And how do these cases typically settle? What options exist for Diane and Ted to settle this mess?
Richard: They are basically five ways that two partners can legally effectuate a breakup.
You buy out your partner;
Your partner buys you out;
You “split up” the business, meaning that each of you takes a portion of the business, usually with some financial adjustment or “settle-up”, since the two portions are rarely of equal value.
A sale of the business by both partners to a third party; and
Dissolution and liquidation of the company.
Of course, there can be multiple variations on each of these themes, so I guess you could say, with apologies to Paul Simon, “there must be 50 ways to leave your lover!”
Jeri: And that sounds like a great subject for our next blog!
Richard Lambert, Esq and Jeri Quinn, CBC, are co-founders of the Business Divorce Institute…