Mediation can be a very effective way to avoid substantial legal fees and costs in any litigation, but this settlement tool can be especially effective in business divorce litigation.
Mediation in Civil Litigation
When parties battle it out in typical civil litigation, there are often two things being decided by a court (or, sometimes, a jury) – liability and damages. In other words, first, the court has to decide whether the defendant did anything wrong, and then how much (if any) damages that wrongful conduct caused to the plaintiff. This is true whether the case is a simple breach of contract, a complex fraud scheme, or anything in between.
Therefore, knowing when to enter into mediation (often with a retired judge) is somewhat of an art form. Mediate too early and the parties have no idea how strong or weak the plaintiff’s case is. Mediate too late and the cost savings from an early settlement are eroded.
Mediation in Business Divorce Litigation
So, why is mediation an especially effective tool in business divorce litigation? Simply put, while the majority shareholder defendants will usually not admit that they have done anything wrong, very often they want to buy the plaintiff out every bit as much as the plaintiff wants his shares to be purchased. In other words, a disaffected minority shareholder is often more trouble than she is worth, and it is more-times-than-not a good business decision to buy out that shareholder, even if you believe there is no minority shareholder oppression whatsoever.
That means that, while there is no admission of liability, the parties are not really fighting about whether the majority (or the company) will be buying out the minority shareholder (liability). Instead, the true fight is often over the value of the shares and any other payments that may or may not have to be made (damages). Because of this, mediation can often be an effective tool in a business divorce case.
A Business Divorce Remedy?
This is not a one-size-fits-all rule, of course. Often the majority shareholders enter negotiations only because they believe they can pick up the minority shareholder’s interest at a substantial discount. This can go so far as believing that the minority shareholder is so desperate to settle and avoid legal fees that he is effectively “over a barrel” and will sell his shares at almost any price. Majority shareholders may well take the position that, since we did nothing wrong and have no reason to buy you out, we should get a huge, often unreasonable, discount. Therefore, mediation – like any other litigation tool – has to be used effectively.
A minority shareholder can only truly negotiate effectively if he is negotiating from a position of strength. What that means precisely, though, varies extensively from case-to-case. In one case, the oppression and right to be bought out might be so obvious that it hardly needs illumination (even if the majority shareholders won’t openly admit it). In another case, it will take the depositions of the majority shareholders to “soften them up” and make them willing to discuss a realistic (as opposed to ridiculously low) purchase price.
In short, mediation can be an effective tool in business divorce litigation, if your attorney is experienced enough to know how – and when – to use it.
If you have any questions about this post, shareholder disputes, or any other related business law matters, please feel free to contact me at email@example.com.