Experience teaches us that all relationships have ups and downs, including those existing between business partners.  When the relationship becomes strained between partners in a private company, however, the majority owner of the business must decide whether these problems are fixable, or whether the best decision is to remove the partner who holds a minority ownership stake in the company.  This is Part 1 of 2 posts, and it focuses on identifying some of the most common characteristics of difficult business partners.  When these vexing attributes exist in a business partner with a minority ownership interest in the company, the majority owner needs to consider whether to buy out the partner’s stake, or at least end his/her involvement in the day-to-day operations of the company.  In Part 2, we will discuss the process for the company’s majority owner to remove a difficult partner from the business, and we will also look at strategies that enable minority investors to exit the business and secure a buyout of their ownership interest in the company when serious conflicts arise with the majority owner.

Prevent Conflicts Before They Happen

The best way to avoid becoming involved in a dysfunctional business relationship in a private company is not to go into business with a difficult business partner.  This may sound like a high bar to overcome because it is hard to accurately predict how a relationship with a new business partner will ultimately pan out.  But, there are concrete steps potential business partners can take before they go into business together to determine if they are likely to be a good match when they join forces in managing and building a private company.

First, the potential partners can hire an experienced business coach who can evaluate their value systems, their approach to business issues, and how they handle conflicts that arise in the business.  The coach can then provide them with a recommendation as to whether they appear to be compatible or whether there are major differences between them, which may lead to conflicts in the future.  Second, the partners can also take available/standardized tests, which will provide an overview of their personality types and traits that help them to assess if they likely to gibe in working together.  Finally, the partners can work together on a detailed business plan for the company that covers the following items:  (i) their job titles and duties, (ii) how the company will be financed, managed, and marketed and (iii) how they will handle the exit of a partner from the business in the future.   The way the partners work through this business plan may confirm that they are compatible or it may highlight significant personality conflicts and/or differences in their values, which raise red flags as to whether they would work well together as partners.

This type of pre-planning requires time and money, but is worth the effort and expense, because it will help avoid a potentially disruptive and public legal fight over a partner’s future exit from the business.  Further, and discussed in Part 2, before business partners start, purchase or invest together in a private company, they should negotiate and adopt a buy-sell agreement or other form of a detailed, written partner exit plan.
Continue Reading When to Pull The Plug: Is It Time to Say Goodbye to Your Business Partner? (Part 1)

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It is common for private company co-owners to have disagreements while they operate their business, but they typically work through these disputes themselves.  In those rare instances where conflicts escalate and legal action is required, business partners have two options—filing a lawsuit or participating in an arbitration proceeding.  Arbitration is available, however, only if the parties agreed in advance to arbitrate their disputes.  Therefore, before business partners enter into a buy-sell contact or join other agreements with their co-owners, they will want to consider both the pros and the cons of arbitration.  This post offers input for private company owners and investors to help them decide whether litigation or arbitration provides them with the best forum in which to resolve future disputes with their business partners.

Arbitration is often touted as a faster and less expensive alternative to litigation with the additional benefit of resulting in a final award that is not subject to appeal.  These attributes may not be realized in arbitration, however, and there are other important factors involved, which also merit consideration.  At the outset, it is important to emphasize that arbitrations are created by contract, and parties can therefore custom design the arbitration to be conducted in a manner that meets their specific needs.  The critical factors to be considered are: (i) speed—how important is a quick resolution to the dispute, (ii) confidentiality—how desirable is privacy in resolving the claims, (iii) scope—how broad are the claims to be resolved, (iv) expense—how important is it to limit costs, and (v) finality—is securing a final result more desirable than preserving the right to appeal an adverse decision.
Continue Reading Feuding Business Partners in Private Companies: Considering Arbitration to Resolve Partnership Disputes

The legal front remains forbidding for private company minority investors who seek to secure a buyout of their ownership stake based on claims for oppression against the company’s majority owners.  It has been six years since the Texas Supreme Court eliminated a court-ordered buyout as an available remedy for minority shareholders claiming oppression, and no other legal avenue exists that provides minority owners with a buyout of their interest based on claims for mistreatment by business owners who manage the company.  See Ritchie v. Rupe.[1]  The best advice for minority investors therefore is simply this—before investing in a private business, minority owners need to insist on securing a buy-sell agreement.

We have written extensively about the terms of buy-sell agreements in previous posts (Read Here).  A buy-sell contract provides investors with the right to obtain a buyout of their minority ownership interest in the company at a future time.

No BuyOut For Breach of Fiduciary Duty

When minority owners have claims for misconduct by majority owners, these claims most commonly include: (1) breach of contract, (2) fraud, and (3) breach of fiduciary duty.  None of these claims permit the trial court, however, to award the minority owner with the remedy of a buyout of his/her or its minority interest.  Instead, the remedy for these claims is typically the recovery of actual damages.  In the case of fraud, if the minority owner can prove that he/she was fraudulently induced to make the investment in the company, the court could rescind the transaction and require the majority owner to return the investor’s purchase price.  Instances of outright fraudulent inducement are relatively rare, however, and this will not be a claim or remedy available to most investors.  The fiduciary duty claim against the majority owner in control of the company does give rise to a potential shareholder derivative action, however, which is discussed below.
Continue Reading The Plight of Oppressed Private Company Minority Investors:  No Legal Escape Available Without a Buy-Sell Agreement in Place

In February 2009, Pittsburgh Steelers wide receiver Santonio Holmes made a toe tapping catch in the back corner of the end zone[1] to secure a thrilling, come-from-behind win and crush the hearts of Arizona Cardinals fans in Super Bowl 43.  For private company owners running their own firms, the boundaries for their conduct are

There are many reasons for business owners to consider adding new partners, including to secure additional capital, to add needed expertise to help grow the company, to bring family members or close friends to join in building the business and to put a succession plan in place. Adding new partners can therefore provide a boost to the company’s revenues, lighten the load carried by the founder, and put the business on course for long-term success.  But this decision is not without risk because the new business partners may create conflicts, disrupt the business and insist on making changes that put the company’s existence in peril.

If after carefully weighing the pros and cons, business owners decide to move forward in adding new partners, this post reviews important steps they can take to protect themselves and the business from the decisions and actions of these new stakeholders in the company.

Equity Ownership Can Be Conditional or Subject to Cancellation

One protective step business owners can take when adding a new partner is to make the addition of a new partner’s ownership conditional or subject to cancellation. This approach permits the owner to wait to grant the ownership interest in the company to the new partner until he or she has met specified business goals by a certain date or to cancel the grant of equity to the new partner if the specific goals have not been achieved by the agreed date.
Continue Reading Keeping Eyes Wide Open When New Members Join the Pack: A Cautious Approach to the Addition of New Business Partners

There has been considerable speculation that one consequence of the Coronavirus will be an increase in the divorce rate resulting from togetherness imposed by the quarantine that pushes marriages already on shaky ground over the brink.  Whether divorces will increase in the future due to Covid-19 remains an open question, but what is certain is that a sizable number of future divorces will involve the transfer of a business ownership interest between spouses as part of the divorce.  To address this situation, this post focuses on key business issues that arise when one spouse (the “Divesting Spouse”) transfers an ownership interest in a business to the other spouse (the “Recipient Spouse”) as part of a divorce settlement.  Addressing these issues will help the Recipient Spouse continue to run the business successfully and also avoid future conflicts with the Divesting Spouse, as well as with future investors and potential buyers of the business.

1. Don’t Rely on Divorce Decree or Settlement Agreement to Document the Transfer of a Business Ownership Interest Between Spouses

A divorce decree and settlement agreement will document the terms of the divorce and the division of property between spouses, but it is not a good idea to rely on the decree or the divorce settlement to memorialize the transfer of a business interest between spouses.  There are a number of reasons for the Recipient Spouse to insist on securing a stock transfer agreement (or its equivalent), including the fact that the Recipient Spouse will likely be required to show the transfer document to third parties in the future, including banks or other lenders, new investors, company officers or managers, and potential future buyers.  The Recipient Spouse will not want to show the decree or settlement agreement to these third parties, however, because they include private matters unrelated to the business.  This will therefore require the Recipient Spouse to prepare a heavily redacted document for review by third parties.  It is more efficient to simply require a transfer document to be signed that is limited solely to issues related to the business.
Continue Reading Family Law: Transferring Private Company Interests in Divorce—Going Beyond the Basics to Ensure Continued Success and Avoid Conflicts

L to R: Tom Bronson, Ladd Hirsch

Recently I had the pleasure of sitting down for a virtual interview with my friend, Tom Bronson, as part of his Mastery Partners webcast series.   Tom has a wealth of experience helping business owners prepare to sell their companies, and we visited about how

In the midst of a global Pandemic that is devastating to the health of our community and to our economy, the last thing on the minds of private business owners may be the future sale of their company. But while business owners are sheltering safely at home as ordered, they may be wise to consider adopting a longer term view, and evaluating specific steps that would help to position the company for a future, profitable sale.

This post reviews potential hidden value in the business that the majority owner can bring to table to enhance its sale value, but which may not be reflected on its financial statements. This discussion does not present an exhaustive list, and instead, the purpose is to prompt a review of the company’s existing or potential business assets that may require further development after the Pandemic subsides and business activities are permitted to resume.
Continue Reading Unlocking Hidden Business Value: Securing Top Dollar by Giving Full Appreciation to All Available Assets On The Sale of a Private Company

“You can’t always get what you want
But if you try sometimes, well, you might find
You get what you need”

You Can’t Always Get What You Want, The Rolling Stones

In addition to Mick Jagger’s legendary performances on stage and vinyl, the song lyrics of The Rolling Stones reflect wisdom that often goes unappreciated. This post focuses on issues that arise when spouses divide their private company ownership interests in the context of family divorce proceedings. When the private company ownership stakes held by the couple are highly valued, there is a potential for a win-win property division and settlement in the best interests of both spouses. You Can’t Always Get What You Want therefore aptly describes the prospects of negotiating a successful Business Divorce in a marital divorce action.
Continue Reading Family Law: Getting What You Need in Divorce—When It Isn’t Possible to Get All That You Want

Navigating a successful business exit when a marriage ends in divorce often presents challenges for both parties. Leaving aside the emotional tensions present in divorce, resolving conflicts regarding the ownership of business interests in the marital estate is also daunting. This post therefore reviews options for divorcing spouses in their divorce proceeding. If couples can ratchet down the emotions and the acrimony, the tools discussed in this post may help allow the couple to optimize the financial outcome of their divorce settlement and preserve the value of the company they own or in which they share a large ownership stake.

The Valuation Dilemma

The most contentious business issue in many divorce proceedings is the value of the business that must be divided as part of the divorce settlement. Valuation is an inexact science, and the divorcing couple can easily spend hundreds of thousands of dollars on expert and legal fees battling it out over the value of one or more private companies included in the marital estate. This challenging issue is not subject to any easy fix. But there are some options the couple may want to consider before engaging in an expensive and time-consuming valuation battle.

(a) Marital Agreements.   Couples can eliminate the private company valuation battle by entering into a marital agreement that specifies what specific assets will be shared on divorce, or what amounts will be paid, and the agreement can also specific how the value of any assets will be determined. While a pre-nup is more common, couples can also agree to enter into a post-nup that details a property division and removes any conflict regarding the valuation of specific assets. Texas statutes set forth strict requirements to follow for marital agreements be enforceable. See Chapter 4 of the Texas Family Code

(b) Designated Valuation Expert. The couple can agree to pre-select and designate a valuation expert they both trust to conduct the valuation for them and to be bound by whatever value is determined by this mutual, trusted expert. Alternatively, there are variations on this approach, which give the couple the right to retain valuation experts if they don’t like the value that is determined by the designated expert and the results of these additional experts will then be averaged to determine the final value. 
Continue Reading Family Law Post–Maximizing Private Company Value in Divorce: Achieving a Successful Business Divorce When the Marriage Fails