What is a Business Divorce?

Business Valuation Why This Matters During the Divorce Process

Business divorce, like traditional divorce, is the legal process of severing a relationship. The legal proceedings involved in a business divorce can endure similar stress to a marriage divorce. Generally, all owners or partners should agree that business divorce is the best option for their company. Knowing the time and reason for seeking a business divorce is critical to navigating through the process. 

There are many reasons a business may choose to divorce. A few main ones are that the partners or owners can no longer agree on the direction of the company, one or multiple owners want to retire, or there are other investments or merger opportunities for the business. Regardless of the reason, it is best that each owner or partner seek legal advice before severing their business relationship. 

The Business Divorce Process

Traditionally, a business divorce entails the court ordering the dissolution of the corporate entity. However, it is not always possible to end the corporate partnership through a court order. Sometimes, a frustrated business partner needs to employ additional strategies outside of the legal system to bring about the separation.

When a true business divorce is possible, the parties will seek dissolution using negotiation, mediation, or, when necessary, litigation. There may be paperwork for the parties to submit before starting the divorce process. Next, the parties will properly divide all business assets and liabilities. The parties will look to the business documents and agreements to help divide the assets. Though, even with the most thorough written agreement, there will still be issues and concerns to deal with before the business divorce process is final. 

Concerns to Address Before Business Divorce 

Before making the decision to sever a business relationship, both parties must consider a number of issues before beginning the process. The business partners will need to decide whether the division of the company’s assets, such as money and property, will be a component of their business divorce. The business divorce can be made easier if the parties went into the joint venture knowing exactly which business assets each owned or was entitled to.

If there will be an asset division during the business divorce, it is crucial to understand what the assets are and who owns them. Do any of the business partners own any of the company’s physical assets, such as company cars, office property, electronics and office equipment, or office furniture? If one of the partners bought or owned the property prior to the relationship, then they will be entitled to that property.

The existence of intellectual property and if it is covered by any license agreements should also be known by parties thinking about a business divorce. Knowing the assets of the company will help the partners determine their relative ownership stakes in it and guarantee that all pertinent assets are taken into account when determining the company’s value.

In addition to knowing the assets of the company, the partners should also be aware of the liabilities that still remain. Addressing the liabilities and if one or both partners are responsible for them can be a major hurdle when seeking a business divorce.

Owner and Partnership Rights During Business Divorce

Business owners, and their legal counsel, should be aware of their rights in the event that their company is dissolved prior to starting a business divorce. Business owners should analyze the firm’s governance documents with their attorneys, which may include the bylaws, shareholder agreement, limited liability company (“LLC”) agreement, and a partnership agreement. The partners’ or owners’ rights will vary depending on the type of entity the business is (LLC, S-Corp, C-Corp, LLP, etc.). 

Business owners ultimately need to comprehend how the company’s bylaws will affect their legal options in a divorce and whether mediation, litigation, or another approach would be preferable. The effect that pertinent state statutes and case law have on the business divorce and the possible asset division is crucial to that assessment. For instance, states may have various rules for both voluntary and involuntary business dissolutions, which will affect the rights of owners.

Take Delaware as an example (most businesses choose to register in Delaware because they have favorable business laws). A business seeking a divorce here can only be dissolved involuntarily if the company has 50-50 ownership and one owner seeks dissolution. Other than this scenario, Delaware does not allow involuntary dissolution. 

Litigation a Business Divorce 

Generally, parties will seek to resolve a business divorce through out-of-court means like mediation, arbitration, or negotiation. Those seeking a business divorce must take a few preliminary actions if they decide that litigation is necessary. 

First, each party must choose an objective and a strategy for achieving it, whether that strategy is complete separation and dissolution or the continuation of a changed business relationship. Second, the parties must decide which facts will serve as the foundation for their arguments in favor of the business divorce.

In addition to the claims and set of mutually agreed facts, the parties must also consider how long the proceedings will take. If uncontested, a business divorce will go through the entire litigation process in roughly 6-8 months. However, if it is a contested business divorce, it is likely to last 1-2 years. Lastly, litigation is expensive. The parties will need to decide if they or the business can incur the costs of the litigation process. 

Examples of Business Divorce 

TransPerfect is a prime example of why agreements are vital to a company’s future. The translation-software business experienced a business divorce alongside a relationship divorce. Elizabeth Elting and Philip Shawe started TransPerfect together, and the company was able to outlast the couple. However, the relationship then began to take a downspin, but no agreement ever addressed how one partner could leave, should they choose. 

The partners began to fight over business decisions—even at the most basic level—and their management styles began to clash. They took the case to court to let a judge decide the outcome of their business divorce. The court ordered the sale of TransPerfect due to the partner’s “deadlock.” According to a Bloomberg article, the company was auctioned off in order to settle the dispute because they could not come to another resolution. 

This is a prime example of why agreements and termination clauses are important for the success of a company. They are also crucial when a dispute arises because the case can likely be settled outside of court. Additionally, it is equally important to have an attorney review the agreements should a business divorce become evident. An attorney will be able to help address the issues, and potentially settle the case outside of court. Should the case need to be filed with the court, an experienced attorney will also be able to litigation the case to the end. 

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