Thursday, April 11, 2019

When Disaster Strikes: 10 Key Steps to Protect Yourself in a Business Divorce

As equity owner, you operate a business entity or department, as partner, manager, managing member, director, officer, etc.   When your business “partners” have gone “hostile” or, as a result of this hostility, have expelled you from the legal entity that operates your business, you should consider taking several immediate steps for your own self-protection.

1.    Segregate your fiduciary role from your personal role.   Out of habit, you might want to assert your continuing rights in your fiduciary role.  You want your voice to be heard and heeded.  Yet, by acting to assert your fiduciary role, you expose yourself to claims of self-dealing, breach of duty of loyalty and intentional damage to shared rights.  Thereby, your personal interests may suffer due to possible conflicts between personal rights and fiduciary duties.  So, resigning your fiduciary role should normally eliminate a conflict and free you to pursue personal goals from the outside.  You might enjoy an advantage in reconnecting personally with clients (if you are not subject to a non-compete covenant) or regrouping with certain employees (if you don’t have a non-solicit covenant).  If you have the freedom to do so, you could become the new professional advisor, “business partner” or even a new part-time employee of a key client, giving you not only cash flow but other benefits as well.

2.    Clearly identify friends and foes.  Establish criteria for segregating friends and foes. And then consider pursuing new alliances if that’s feasible. This will help map a plan with friends through joint strategy and shared resources with the ability to potentially receive common advice from professional advisors supporting all of your “friends” as a group (if that’s what you want) and avoid fruitless delays of pursuing “blind alley” discussions with your foes.

3.    Be honest with yourself about mistakes made by yourself as well as others.  This is a learning opportunity before you leap into the same scenario again.  What values were in conflict (money, power, control, domination, transparency)?  What personality types crossed your wires (micromanagers or project managers working under a plan, budget, goals and deadlines)?

4.    Prioritize to protect your mental and physical health.  Yes, litigation is a tool to assert rights and obtain the remedies of justice.  But, as Ambrose Bierce said in his “Devil’s Dictionary,” a litigant is one who freely gives up his shirt in the hope of saving his skin, while litigation is a machine where enter as a pig and exit as a sausage.  Consider alternative dispute resolution, such as ad hoc arbitration and mediation. Even a partial agreement on certain elements of business separation can limit the harsh personal impact of ongoing disputes.

5.    Hire professional advisors, not only to fight, but also to settle and restructure.  Understand that a litigator might have a financial incentive to continue the formal dispute whereas a conciliator might focus on limiting financial/public damage to all parties involved in bargaining for a quick resolution.  In a stressful conflict environment, the insights of professional advisors can help you see clearly to conflict resolution and eventual creation of new opportunities for self-renewal.  An advisor can help define your future goals and keep you on track.

6.    Deal responsibly with failing partners before expelling them.  When a partner is not achieving common goals or acting selfishly, consider giving her or him a deadline for corrective action.  For example, your enterprise might have taken some growth initiatives that continue to require capital contributions by partners or owners who will not be getting the benefit of the future anticipated growth.  All they do now is subsidize the growth partners who are building their business.  In such cases, rather than give the expectation of perpetual unconditional support, meet with the “growth” partners and search for agreement on interim goals, a future go/ no-go decision for continued support, criteria for continuation vs. separation, and budget for limited future funding of the “growth” opportunity.  If done smartly, the separation of the failing “growth” partners could result in future rewards from future shared business opportunities or even future co-branding.  You could convert a “global partnership” into a “country-by-country partnership” under a global shared brand, with structured incentives for cross-referrals and future collaboration.

7.    Set up a plan and communicate it.  If others disagree, at least you will know what won’t work and who won’t cooperate.  Then redesign the plan.  After multiple iterations, you might achieve consensus.  If not you will understand the framework for litigated dispute resolution.

8.    Get the facts.  Do your own due diligence as if you were buying or selling the company.  (You might have to do one or the other anyway.)  Does the company own all its assets in its own name?  Can some ongoing liabilities be transferred to others, such as by a sublease of rented premises, and if so which third party consents would be required? 

9.    Look for a complete solution (indeed, one that might include potential future collaboration without requiring it).  But plan for partial solutions.  A complete separation agreement has many moving parts and includes both accounting for past mistakes and current assets.  A good solution might also consider a future reward for future mutual benefit, such a non-exclusive software license agreement, a sales commission agreement, and other arrangements that promote collaboration and discourage disparagement, denigration and “unfair” competition.

10.    Address the particular structural issues and governance rules in your organization.   For example, a partnership of lawyers generally face limitations on effective governance since a minority might block the separation agreement, even if the terms are fair to all.  Restructuring is essential at all stages of the organization’s development, so that future scenarios do not torpedo the entire enterprise.  Restructuring promotes joint decision-making and can provide a smooth exit path for those partners who cannot keep up with the new direction of the majority in interest.  Such scenarios may include rapid growth, investment in new technologies, death, resignation or incompetency of a partner or group of partners or the loss of key clients.  Partnership and shareholder agreements should be updated every five or ten years.  By being explicit about governance rules, all partners can feel confident of the future direction, their opportunities to share in future rewards and understand a transparent framework for compliance not only with legal mandates but also the organization’s evolving spirit.

Above all, in a potential business divorce, it is important to maintain clear communication channels, seek professional advice on strategies and tactics and find resolutions which will work not only for you but for your partners as well.

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