By: Marc C. Laredo, Esq. Laredo & Smith, LLP
The break up of a closely-held business, if not properly managed, can have disastrous consequences for all concerned. There is a means, however, for avoiding, or at least tempering, the negative effects of a break up: a well-crafted, written agreement between or among the founders that allows them to each achieve their personal goals while striving either (a) to maintain the business as an existing entity or (b) to dissolve the business in an orderly fashion so that the individual owners can continue to do business, albeit in a different form.
The causes of a break up can include compensation issues, changes in an owner’s family situation, and disagreements about the number of hours owners are working. Whatever the cause, business disintegrations are often quite traumatic, both personally and financially. Sometimes, it can even lead to litigation among the parties, a result that can be costly to the owners and destructive to the business.
Any business owner involved in such a situation should undertake the following:
- Retain legal counsel with experience working with closely-held businesses in break up situations. An experienced attorney can guide the owner through the legal and business issues involved in a break up.
- Obtain the services of a certified public accountant or other financial advisor. He or she can serve as part of the “team” negotiating the separation of the owners, reviewing the company’s financial records and advising the owners on the financial aspects of any agreement.
- Recognize the emotional impact that an ending of the owners’ relationship can have. Break ups akin to divorces, with all the attendant feelings of anger, frustration, and sadness.
- Understand your legal rights and duties. Shareholders in closely-held Massachusetts corporations, like partners, owe one another “fiduciary duties.” This means that owners must treat one another fairly, act in good faith, be honest, and not take corporate opportunities for individual use.
- Candidly evaluate the business situation. Should the business survive as an entity with one or more of the owners leaving? If an owner leaves, will he or she be able to start a competing business? Will the business be better off dissolving with each owner starting his or her own business (this may be an appropriate course of action for providers of professional services such as lawyers or accountants)?
It is important during the course of a break up to pick and choose among issues. Only agree to do what can and will be done. Among the issues that should be considered are:
- Future employment opportunities for the owners. Generally, owners either should be (a) permitted to work for the existing or a competing business or (b) compensated for a restriction on competition (if such restrictions are legally permissible).
- Limitations on solicitations of employees and customers. An orderly process for dividing employees and/or customers (and only if it is a legally permissible manner) usually is in the best interests of all parties. Absent an agreement, there is a greater risk that employees and customers will choose to work for or with third parties, a result that does not benefit any owner or the enterprise.
- Ownership of intellectual property. Businesses typically have an array of intellectual property such as trademarks, copyrighted materials, and web sites. Decisions about ownership of intellectual property, including possible joint ownership, should be part of the dissolution process.
- Division of tangible assets. Assets such as computers, telephones, and office furniture may have far greater value to the owners themselves (given the cost of replacing them) than their book or resale value. Agreements as to how to divide them, rather than sell them to third parties, therefore usually will be mutually beneficial.
- Establishment of wind-down procedures, if necessary. If the business does dissolve, then it will be necessary to establish procedures for matters as telephone, fax, and Internet (including e-mail) services, insurance coverage, payment of bills, and collection of receivables.
- Real estate issues including leases and/or ownership of real estate. Often, the most significant liability of an entity will be a commercial lease, especially if one or more owners are guarantors. Careful review of the lease, often with the aid of an experienced real estate lawyer, usually is warranted. If the entity owns real estate, a fair procedure for either selling the real estate or buying out one or more owners must be established.
- Public announcements. Carefully crafted public statements concerning the break up will be in the interest of all parties.
- Non-disparagement and confidentiality provisions. Typically, the owners will want to keep their disagreements private and should agree not to disparage one another or to talk about the specifics of the dissolution of their relationship.
- Establishment of a dispute resolution mechanism. Undoubtedly, disagreements will arise during the course of the break up: problems with billing work and collecting accounts receivable; undisclosed or unanticipated liabilities; and alleged violations of the agreements are some examples. A procedure for resolving these disputes outside of the courtroom including notice provisions, a time period within which to correct problems, and rules for mediation and/or arbitration should be included. Agreeing how to disagree is an important part of a successful break-up.
A break up of a closely-held business often is a difficult process. A well-crafted agreement can greatly reduce the cost and pain for all involved.
Please Note: The purpose of this article is to provide general information about legal developments and should not be used as a substitute for professional advice on your particular legal situation.