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Being Prepared To File Business Divorce Litigation May Yield a Negotiated Agreement

Business owners who are having a dispute with their business partners (in New Jersey) should not read this blog and assume their only remedy is shareholder dispute litigation.  Because of the cost – both in legal fees, and to your business – litigation should almost always be a last resort.  But being prepared to file litigation often leads to other positive, productive results.

Often when entrepreneurs start a business, they do a great job with the business model, but a lousy job delineating the rights and responsibilities of all the owners.  Quite understandably, such a legal nicety simply does not seem like a priority in the embryonic stages of most businesses.  Because of this, many clients over the years have sought to have a new shareholders’ agreement (or operating agreement for an LLC) drafted.  The buy-sell agreement either does not exist or no longer makes sense, so none of the owners have a clear exit plan.  Or, your “agreement” that your oversight of the finance side would not be interfered with is not in writing, and now your business partner wants to become involved in what has historically been your role.  Another issue that often arises is when one business partner hires relatives – or girlfriends – and pays them more than they are worth.  Something like this can become like sand in your shoe.  It does not seem fatal to the business partnership when it first arises, but over years, it grates on you and wears you down.

It may seem extreme to file shareholder dispute litigation over such issues.  But the effect those issues are having on your relationship with your business partner(s) is the real issue.  When you let your partner know that what he or she is doing is not acceptable to you, your partner’s continuing the behavior, knowing that it is a thorn in your side, becomes the real issue.

If you steel yourself to the possibility that business divorce litigation may be the only way to resolve your issues, you may be surprised to find how often the mere specter of such a filing brings the other side to the negotiating table, even when he or she has never wanted to deal with these issues before.

This is not to say that you should “bluff” a willingness to sue your business partner(s).  It is never advisable to threaten an action if you are not willing to follow through. But often, merely retaining an attorney whose practice focuses on business divorce litigation makes your business partner realize that your concerns are not mere “complaints,” or “whining,” but serious issues that must be taken seriously.

In fact, beginning a dialogue is almost always the main goal.  I don’t think I have had a client yet who preferred full-blown litigation, including a trial.  The goal is always to make some kind of deal.  In some cases, the business relationship is so strained that a buy-out is the only practical remedy, so negotiations tend to focus on price and terms (and willingness to buy out your partner).  But in many cases, the business relationship is damaged – maybe even severely – but not necessarily fatally.  And sometimes, the business owners do not even realize how damaged their relationship really is until such a dialogue commences.  For example, if the issue of having a buy-sell agreement is so important to you that you have hired an attorney who is prepared to file suit if you can’t reach a negotiated agreement, and your business partner still refuses even to discuss the issue, what does that say about the state of your business relationship?