In closely-held businesses in New Jersey with multiple owners, it seems fairly obvious that the more co-owners you can recruit to your side in a business divorce litigation, the better. You don’t need a lawyer to tell you that. However, what is not so obvious is the possibility of recruiting co-owners to your side once the litigation has commenced.
Litigation – especially business divorce litigation – can be quite divisive. If you are one of three owners suing the company, the other two owners will likely take you off their holiday card list, and may also retaliate in many ways. They may fire you, decrease your salary, or simply cut you off from information. All of these acts may have consequences to the majority down the road, but they are all risks of commencing litigation. But litigation also may create an opportunity to either create a rift between the other owners, or exploit one that may already exist.
In one case years ago, my clients were father and son minority shareholders, suing their brother/son and brother-in-law/son-in-law majority owners. The relationship between the factions had become toxic, but the main bad actor was the brother-in-law, not the brother. He was the one taking business opportunities for himself, and undertaking other acts that, we contended, constituted shareholder oppression. He was the one overstepping his authority and making unilateral business decisions – many of which benefitted the company he had started, on his own, on the side.
Since the brother apparently was not involved in most of this conduct, we developed a strategy designed to educate the brother. We believed that he was not really aware of what the brother-in-law was doing. Since he was being impacted just the same as my clients were, there was every reason to believe that, if he only learned what was truly going on, he would be none-too-pleased with his business partner.
It actually worked. When the brother-in-law’s antics came to light, the brother outwardly seemed not to care – at least in front of us. But inside he was seething, which we learned when he ultimately switched sides. On the literal eve of trial, we notified the court that the trial would no longer be necessary, as my clients were now in the majority, part of a new faction that, collectively, controlled the company. The urge to purchase a personalized broom for the brother-in-law’s new job was resisted, but he never had a say in company matters from that day forward. While discovery and trial preparation was still quite expensive, at least a lengthy and expensive trial had been avoided.
It is easy to conclude that all other shareholders are against you, and will stand together against you throughout the case. This does not necessarily have to be the reality. If you can find another shareholder, or group of shareholders, with a common interest as you, you may be able to gain him or her as an ally. After all, most people act in their own self-interest. If you can use shareholder dispute litigation to shine a light on improper activity that only one in a majority faction was involved in, other shareholders may realize that their self-interest may be more aligned with you than they initially realized.
If you have any questions about this post or any other related matters, please contact me at dcroberts@norris-law.com.