Archive for October, 2011
If you no longer trust your business partner, can your business be saved? This may not seem like an issue for an attorney, and may seem more suited for a psychologist. But an attorney well versed in handling shareholder disputes may be able to help save such a business. At the very least, it may be worth a try, because the alternative may be costly and disruptive shareholder litigation.
In order to determine whether the trust can be rebuilt, it is critical to know why the trust eroded in the first place. Did they have control over setting salaries and exercise their discretion unfairly? Did they inappropriately cause the company to repay themselves for personal expenses, a perq that was either abused, or simply not shared with you? Are their family members on the payroll that shouldn’t be, while they refuse to end the practice?
As bad as some of these things may be, their actions would be even worse if they were done surreptitiously. While it may be difficult to hide a friend or relative who is employed by the company, cash payments to oneself may be easier to conceal.
If you are having a dispute with your business partner that appears headed to court, you may want to consider pre-litigation mediation, which may be the best way to resolve the dispute. If the issues can be addressed before the situation gets ugly, huge dollars may be saved on attorneys’ fees, and tremendous business disruption may be avoided. An accountant, clergy member, or business-savvy family friend (trusted by both parties, of course) could act as a mediator in such a case.
Communication is often the key to salvaging a business relationship. In one recent case, we discovered that the 75% owner was treating the 25% shareholder unfairly (providing large bonuses to themselves, instead of paying dividends pro rata) because they believed the minority shareholder was diverting their efforts to another business. When they finally discussed it and the majority shareholder learned that their business partner’s “side business” was really a charity, the entire business relationship took on a different tone. The business relationship was healed simply with direct communication.
If some sort of mediation is opted for pre-litigation, you actually may achieve a better result if both parties sit in a room together, without attorneys being present. That was a difficult sentence for a lawyer to write, but it’s true – lawyers sometimes get in the way of settlements. A client reading this may think that lawyers have an incentive to keep a case going to “churn” fees. While clearly some lawyers do this, I am referring to the simple fact that lawyers and business owners often see things through a different perspective. Lawyers are paid to look for worst case scenarios, while sometimes focusing on the negatives is not conducive to getting a deal done. Nevertheless, in a shareholder dispute where litigation may be inevitable, seeking at the very least behind-the-scenes advice from an attorney experienced in shareholder litigation is critical.
There may be issues that you aren’t aware of that bear on the strength of your case, which would give you confidence, and possibly the upper hand, during your mediation discussions. For example, in New Jersey, the failure to pay dividends to shareholders, when the company could have done so, may constitute shareholder oppression under the right circumstances. Knowing this may greatly strengthen your negotiating hand. Or, you could learn that your complaints, while valid, are simply not recognized under the law as actionable, leading you to rethink just how far you want to push your particular issue.
Pre-litigation mediation may be advisable in certain circumstances, but you are looking for a successful result – not just a result. Be prepared, and be well-advised by someone who has handled cases like yours before. And don’t be afraid to sit down with your business partner and try to save a fortune on legal fees. Unfortunately, there’s plenty of work out there for us shareholder dispute attorneys.
A business dispute with your co-owner can often be resolved in litigation. But the question remains – if you sued your business partner because of improper action on his part, what remedy would you seek?
Many people assume that, when you sue your business partner, it is like any other case in which you are suing for damages. For example, I have been approached by numerous prospective clients seeking to sue a business partner for damages after finding out that he was being – to put it charitably-“overly generous” in giving himself corporate benefits (cars, bonuses and the like). But a case for damages may not be the best available option.
In most cases, the business partner (often a majority owner, or at least a 50/50 owner) took excess funds from the company. Although this may in effect damage the other owners, the claim (at least under New Jersey law) belongs to the company. In other words, if your 50/50 partner helped himself to $100,000 worth of personal benefits, he effectively stole $50,000 from you, and $50,000 from himself. Usually, the right to seek reimbursement of the funds improperly taken belongs to the company.
However, a better remedy may be available. A co-owner instead may allege shareholder oppression, and seek the right either to buy out his business partner or to be bought out. This may not always be the plaintiff’s option, as it is up to the judge to determine who will be the buyer, and who the seller. Therefore, a business owner must understand that he may file the suit looking to buy out his co-equal shareholder, only to have the judge rule that he must sell, instead.
An attorney experienced in such lawsuits can often help a client assess what the most likely outcome in such a case may be, and how to focus the case to help achieve the desired result. For example, careful attention must be paid to facts showing why you are the one who, deserves to maintain ownership of the company, and why your partner should be judicially compelled to sell to you. Obviously, this will be easier if you can actually show that your business partner was embezzling or stealing from the company, but most cases are not so black-and-white. An experienced attorney can help you determine what facts should be emphasized, and how to obtain the evidence you will need.