BUSINESS DIVORCES: Fiduciary Duty in Company Relationships— Introduction

In BUSINESS DIVORCES:  Keeping a Legal Inventory, we discussed how important it is for an owner of a company to know his legal rights — and legal wrongs — when a dispute erupts with other owners.  Assessing those legal debits and credits and objectively calculating their net balance is particularly critical when one side owes (or both sides owe) a fiduciary duty he or they may have violated. 

Beginning with this article and continuing with several future articles, I will try to illustrate the concept of fiduciary duty as it applies in private company settings.  Except where noted otherwise, all illustrations will assume the Company is formed under Texas law.   Before starting, however, I want to recommend that persons owning interests in private Texas companies also read two recent excellent short articles published by Ladd Hirsh of Winstead PC (Dallas):

Introducing the Aggrieved Owner and the Bad Actor

A Company owner thinks he has been personally wronged (the Aggrieved Owner) by a Company co-owner (the Bad Actor).  Aggrieved Owner calls his attorney and is insistent that Bad Actor “breached his fiduciary duty to me and therefore owes me [enter substantial amount of damages].”

Aggrieved Owner’s lawyer replies that a breach of fiduciary claim requires three elements:

First Element: Bad Actor had a fiduciary duty to Aggrieved Owner;

Second Element: Bad Actor breached that duty; and

Third Element: The breach either caused Aggrieved Owner to suffer damages OR resulted in the Bad Actor’s receiving a benefit.

First Element:  Existence of Fiduciary Duty Does Depend on Business Structure

Aggrieved Owner may be surprised when his lawyer tells him that whether Bad Actor owes him a fiduciary duty depends on the Company’s business structure. 

    • If the Company is a general partnership, then there’s good news for Aggrieved Owner:  every general partner owes fiduciary duties to all of the other general partners AND to the partnership itself.
    • If the Company is a limited partnership, the issue becomes a little complicated: the general partner owes fiduciary duties to the partnership and the limited partners; but the limited partners generally do not owe fiduciary duties to each other, the general partner or the partnership.  Whether the client smiles or frowns depends on whether he is a limited or a general partner and whether Bad Actor is a limited or a general partner.
    • If the Company is a corporation, Aggrieved Owner may become confused: directors and officers of the corporation owe fiduciary duties to the corporation but not to its shareholders, and shareholders generally owe no fiduciary duties to each other or the corporation.
    • If the Company is a limited liability company, Aggrieved Owner may become slightly more confused: LLCs generally follow the same principles as a corporation, with managers and officers owing fiduciary duties to the LLC, but not the LLC’s members, and the members generally not owing fiduciary duties to each other or the LLC.

[When “generally” is used, it means “this is the default principle, but exceptions can occur.”]

First Element Continued: Nature of Fiduciary Duty Also Depends on Business Structure 

Aggrieved Owner is put a little off balance by the unexpected complexity of his lawyer’s information.  Asking whether the concept of “fiduciary duty” is as complicated, Aggrieved owner listens as his attorney begins his reply.

Aggrieved Owner quickly realizes that the answer is complicated enough and long enough to be the topic for a future article.

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BUSINESS DIVORCES: Podcast

I was interviewed recently by Peter Mahler for his Business Divorce Roundtable podcast: A Transactional Lawyer’s Approach to Resolving Business Divorce: Podcast Interview with Steve Robinson.

A partner at Farrell Fritz in the New York City area, Peter has over 30 year's experience in Business Divorce Law.  He writes about Business Divorce issues on the New York Business Divorce blog he launched in 2007.  His Business Divorce Roundtable podcast features in-depth interviews of experts from the legal, academic, and business appraisal fields.  For more information about Peter, visit his LinkedIn profile and his law firm's website.

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BUSINESS DIVORCES:  Emotional Intelligence

Why do I choose to write about the concept of Emotional Intelligence in a lawyer’s blog on Business Divorces?  Mainly because an attorney needs a sound Emotional Intelligence (EQ) if she is to successfully “separate the people from the problem” as I wrote about in BUSINESS DIVORCES:  The People Problem.

Also because a famed academic — Howard Gardner, Hobbs Research Professor of Cognition and Education at Harvard Graduate School of Education — calls a person’s Emotional Intelligence “the level of ]his] ability to understand other people, what motivates them and how to work cooperatively with them.”

And because I can think of only a few other areas of law practice where high Emotional Intelligence is more needed than in Business Divorce Law.  (OK, maybe a few, like Family Law, Guardianship Law, Criminal Defense Law, etc., etc.  BUT attorneys choosing to enter those practice areas know they will encounter emotionally fraught clients and situations.)  “Business Divorce” sounds intellectual, rational, objective and technical, like tax, securities, corporate or administrative law, for example.

Business Divorce Law, however, can sometimes require as much EQ as IQ — or more.

Basic Components of EQ

Consider the five generally recognized domains of emotional intelligence outlined by Daniel Goleman nearly 25 years ago in his book Emotional Intelligence:

  1. Self-Awareness, or Knowing One’s Own Emotions
  2. Self-Regulation, or Managing One’s Own  Emotions
  3. Motivation, or Marshaling One’s Emotions in Service of a Goal
  4. Empathy, or Recognizing Emotions in Others
  5. Social Skills, or Managing Emotions in Others

Why EQ Matters in Business Divorce Cases

When owners in a closely held company begin to bicker and fight, the battle may quickly become nasty and bitter.  Things are said that can’t be taken back.  Actions are taken that can’t be forgotten.  Feelings are hurt and remain sensitive and sore for a long time.  Bonds of trust and confidence are broken that can’t be rebuilt.

An attorney venturing into this cauldron of emotion on behalf of one of the owners needs to possess a sufficiently high EQ:

  • to avoid subconsciously adopting her client’s emotions (Self-Awareness, Self-Regulation);
  • to assist the client in turning his emotions toward supporting his interests instead of undermining them (Motivation, Empathy, Social Skills);
  • to recognize, respond to, and handle the emotional outbursts of other owners (and sometimes their lawyers) without responding in kind (Empathy, Self-Regulation, Social Skills); and
  • to turn the emotional concerns and energies of the owners from destructive into constructive ends (All Five Domains).

Conclusion

Everyone needs to develop a robust EQ for all walks of life.  In today’s social media-saturated world, immature displays of unfiltered emotion and outrage can begin to look like the new normal of human discourse.

In Business Divorce cases, some of the primary actors may have difficulty controlling their own emotions or dealing with the emotions of others.  The attorneys in those situations need to practice and model good and sound Emotional Intelligence.

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BUSINESS DIVORCES: Information Disparity among Owners

Two Types of Information Disparity

At an early stage in a business divorce situation, one side usually encounters a challenging hurdle: his opponent possesses much more information about the company than he does.  The problem is a disparity in internal information about the company.

Another kind of information disparity between the owners may exist outside of knowledge about the company itself.  One side may have access to far more information about relevant markets, taxes, legal matters, technology, capital access, the interests of the company’s competitors and other third parties, alternative business opportunities, and many other fields.  (See Business Divorces: Some Common Legal and Business Issues).  That is a disparity in ambient information.

The Consequence of Information Disparity

If not substantially reduced, wide information disparity between the disputing owners can make efforts to negotiate pointless and attempts to mediate useless, and may drive both sides toward the more adversarial, time-consuming and costly venues of arbitration and court trial.

In short, disparate access to information can create a high hurdle to resolution and settlement.

Overcoming Information Disparity

An owner who is on the short side of an information disparity must FIRST find a qualified attorney with expertise in the area of business divorce, discuss the situation thoroughly with him, and engage the lawyer to counsel the owner BEFORE the owner undertakes overt action against her co-owner. 

The attorney and the owner together should compile a checklist of the exact internal company information and external ambient information the owner needs to acquire, along with the best sources for that information.  An attorney with a practice background in business acquisitions and federal securities compliance will know how to apply the due diligence investigation techniques used in those disciplines to establish informational parity among the parties. 

Narrowing the Internal Information Disparity

Back in November 2013, I posted Books and Records Requests in Texas  (an article in need of updating, I admit).  For this blog post, however, I refer to the original article to point out that under the Texas Business Organizations Code, owners of Texas LLCs, limited partnerships, corporations, and general partnerships are statutorily entitled to inspect the books and records of the companies they own.

With the aid of a qualified attorney, exercising that statutory right ought to be among the first steps that an owner on the short side of a disparity of internal information access should take.  It is critical that the demand be properly made in accordance with applicable law and instill in its recipient a sure and certain confidence that the owner (and her lawyer) will pursue the demand aggressively.

In my experience, a well made and persistently pursued B&R demand will typically yield an enormous storehouse of information about the company and its business.

Narrowing the Ambient Information Disparity

Again with the help of a qualified attorney, an owner who is short on ambient information should identify those areas of information external to the company that are relevant to the situation and should search out those other persons and sources that can fill in the ambient information gap.

Evaluating and Weighing the Information Obtained

The attorney’s most valuable role In the information gathering process will be to assist the owner in analyzing and understanding the information acquired.

Does the information appear to be accurate? Complete? Significant?  What does it mean, if anything, in the context of the owner’s position and goals?  How can the information be verified?  What does the information — or lack of information — reveal about the other side’s integrity or competence?

And there are two other major questions.  When the diligence investigation has ended, what information is still missing?  When is it in the owner’s best interest to stop digging for more information?

Answering such questions requires good judgment, and good judgment requires prior experience.

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BUSINESS DIVORCES:  Drafting the Resolution Agreement — Setting the Subject Scope

Drafting the Resolution Agreement — Some Typical Provisions  posted last month discusses some of the terms typically found in a business divorce resolution agreement.

Here is a short discussion about the set of terms in a business divorce resolution agreement which defines its subject scope.

Which Terms in the Agreement Define its Subject Scope?

Several different provisions in the agreement read together may identify the matters the parties expect the agreement to cover and the matters the parties do not intend the agreement to address — that is, the subject scope of the contract.

Among those provisions are the recitals and the merger clause (also referred to as the integration clause, saying that this written document contains the entire agreement of the parties).  Other sections that can evidence the subject scope include the release and the post-closing covenants  (the parties’ future obligations).  Add, also, the Governing Documents.

If the agreement is well drafted, these different sections fit together tightly, without gaps between them and without conflicting with each other.  Because some of these provisions are “boilerplate,” however, it can be easy to slap them into the agreement instead of joining them together carefully.  When that occurs, the drafters are setting the stage for another battle between the parties.

A Good Idea: An Explicit Provision about Scope

The agreement should precisely define its objective in a designated section that sets forth the parties’ exact intentions in choosing to enter into the agreement.  That paragraph can prove crucial in interpreting other terms of the contract in the future.  It is essential for the parties to express what relationship, dispute, obligations, rights, and so on they want to end, settle, release and terminate.  Equally important is the parties’ clear expression of what existing matters they wish to remain in effect.

An Example of the Problem if the Subject Scope is Fuzzy

Here is an example, from real life, of the fuzzy subject scope problem.

The Governing Documents of the company in which the parties are members contain one provision restricting members from competing with the entity (Noncompetition Covenant) and another obligating the entity to indemnify members against third-party claims based upon actions they take on behalf of the company (Indemnity).  Both sections explicitly provide that they survive a member’s withdrawal from the company.

The company’s members quarrel.  They enter into a business divorce resolution agreement under which Smith withdraws from the company while Jones and Brown, the remaining members, continue the business.

The recitals and merger clause in the business divorce agreement do not reference the Noncompetition Covenant or the Indemnity.  Likewise, the release given by Smith does not carve out an exception for the Indemnity.

A few months later, a third party sues Smith for something he did while a member of the company.  He writes the company to invoke his indemnification rights under the company’s Governing Documents.

It is no surprise — except to Smith — that the company (Jones and Brown) decline his claim for indemnification.  After all, in the business divorce agreement, Smith released the company from all of its contractual obligations to him.

When Smith opens a new business that competes with his old company, he hears again from Jones and Brown.  Now they are invoking the provisions of the company’s Governing Documents the prohibit a withdrawing member from engaging in a business in competition with the company.  Because the company did not release Smith from the competition restrictions when he withdrew, Smith realizes — too late — that he has another problem.

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BUSINESS DIVORCES:  Drafting the Resolution Agreement — When Will Closing Occur?

Drafting the Resolution Agreement - Some Typical Provisions posted last week briefly discusses three kinds of provisions typically found in most business divorce resolution agreements.  (The single essential term in every divorce agreement — Mutual Releases — is addressed in Drafting the Resolution Agreement - The Single Essential Provision.)

I had planned to use this week’s post to write about some additional typical provisions that usually belong in a business divorce agreement.

As I began writing, however, I realized that it might be helpful to discuss simultaneous closing agreements and deferred closing agreements. Some clients don’t understand the difference; some clients don’t comprehend why an attorney prefers to choose one over the other.  Whether the closing is deferred or not also affects whether many provisions need to be included in the contract. 

First, some Elementary Negotiation Theory

Whenever two persons negotiate the terms for a possible transaction between them, at least two sets of negotiation are happening.

When they discuss the actions each will take and the promises each will make to the other, those persons are negotiating about the subject matter of the negotiation.  That set of negotiations is overt:  they speak words to one another and they exchange written drafts of a potential agreement.   This set of negotiations is important, of course.

At the same time, a more important set of negotiations is ongoing.  That set is the negotiation about the procedure of the negotiation, or negotiation about the negotiation.  The negotiation about the negotiation is often silent although real.  That negotiation expresses itself through various manners: words not spoken, language not included in drafts, scheduling of meeting places and times, and many other ways.

Next, the Topic Defined: Simultaneous or Deferred Closing

Like an asset or stock purchase agreement, a business divorce agreement may contemplate a simultaneous or a deferred closing.  If the actions take place when the agreement is signed, the closing is said to be “simultaneous” because the contract and the transactions it contemplates occur at the same moment, legally speaking.  When those transactions will occur after the date of the agreement’s signing, there is a “deferred” closing.

A common example of a deferred closing agreement that everyone is familiar with is the residential purchase contract for buying a home.  In contrast, a contract to purchase a car is commonly a simultaneous closing agreement.

How Negotiation Theory and the Choice between Simultaneous or Deferred Closing Converge

Our post Drafting the Resolution Agreement — Initial Choices  describes the different ways that parties in a business divorce can document their discussions and agreements.  Even when negotiations progress to the point where the owners can enter into a definitive agreement,   they may nevertheless disagree over a simultaneous versus a deferred closing.

Where the actions to complete the divorce are few and uncomplicated, and also not dependent upon conditions beyond the parties’ control, a simultaneous closing agreement appears to be the better choice.  In contrast, when the completion of the divorce depends upon a condition that the parties to the agreement cannot effect (like a lender’s release of collateral or the approval of a governmental authority), a deferred closing agreement will be necessary.

Between those two clearly opposite situations, however, the choice between a simultaneous or a deferred closing agreement can become gray.  That is one of the regions where the “negotiation about the negotiation” that has been underway from the commencement of negotiations can determine whether the owners enter into a simultaneous closing or a deferred closing agreement.

An Illustration

Imagine a business divorce where there are no third party approvals necessary for the divorce to occur and no other obstacles to closing that are beyond the owners’ control.  Accordingly, there is no compelling reason for the owners to select a deferred closing agreement instead of a simultaneous agreement.

Imagine too that the first owner is unwilling to sign anything until everything is agreed upon in writing to the minutest detail.  That includes the execution form for every one of the separate ancillary documents, which may consist of an amendment to the company’s governing documents, an assignment of ownership interest, a noncompetition or consulting agreement, asset assignment instruments (including deeds), and so on.  

The second owner is different: eager to get everyone legally committed to an enforceable contract as quickly as possible, he wants to sign as soon as the material terms have been agreed upon although specifics remain to be finalized before closing.  The second owner is willing to leave the drafting of the separate ancillary documents to the post-signing, pre-closing period.  He believes that the first owner and her attorney may take days or even weeks to agree on the final forms of all of the ancillary documents.  Also, he suspects that the first owner and her attorney may try to take advantage of the ancillary document drafting process to further negotiate some of the substantive terms of the business divorce agreement.

If the first owner prevails, there will be no written contract (and he will not be bound) until the agreement and all ancillary documents are absolutely final.  However, while he protects himself from becoming bound until every i and t have been dotted and crossed to his satisfaction, the second owner may so improve his BATNA (see The Importance of BATNA) that he elects NOT to sign the agreement.

If the second owner prevails, he will have bound the first owner to go forward with the divorce on “legally sufficient” but possibly bare-bone terms.  However, the second owner may come to rue his haste, since he will be as legally bound to the divorce actions as the first owner.  What does the second owner do if the parties stalemate over the drafting of the ancillary documents?

The Conclusion

Here are two opposing examples of inertia.  The first owner prefers to stand still until she becomes convinced that the path forward will be free of obstacles.  The second owner prefers to create the momentum that he feels is necessary to consummate the divorce.

The owner who prevails in this contest will likely be the owner who, from the beginning, has acted more consciously and deliberately to win the “negotiation about the negotiation.”

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BUSINESS DIVORCES:  Drafting the Resolution Agreement — Some Typical Provisions

Drafting the Resolution Agreement — The Single Essential Provision posted last week addressed the single essential term every business divorce agreement must cover: Mutual Releases. 

The other material provisions of business divorce agreements, however, may vary, because every business divorce is different.  This post discusses some of the terms typically found in most — although not all — agreements.  A future post will cover other commonly used provisions.

Recitals or Premises

The premises for the agreement appear on the first page, right after the preamble.

Some attorneys (especially young attorneys) disdain inserting premises, thinking they are unnecessary or old-fashioned.  Many contemporary form agreements eliminate recitals.  For example, a wide range of standardized transactions (such as a residential real estate purchase and mortgage) are effected efficiently by using uniform agreements without recitals.  Document uniformity and (relative) simplicity is necessary for such transactions to occur.

Nonstandard transactions necessarily require the opposite.  Every business divorce is different, so every resolution agreement must be fitted to the unique circumstances and terms of that divorce.

That is why recitals or premises remain important for business divorce resolution agreements.

The premises evidence the parties’ acknowledgment of the fundamental reasons they are entering into this agreement.  They serve to prove the parties’ intentions.  If you can write the recitals, then you comprehend the transaction and can draft the rest of the agreement.  Individuals who review the document in the future — perhaps to amend it — need and will have a straightforward introduction to the circumstances that produced it. 

Nondisclosure or Confidentiality

Nearly all business divorce agreements include mutual confidentiality provisions.  After all, the owners of a private company like to keep the company’s business private; that includes internal disputes and the terms on which they settle.  Like any NDA, however, exceptions must be made to permit the parties to share information with their professional advisors or as the law requires.  Other carefully crafted carve-outs may obviate anticipated problems, such as inquiries from the company’s or a party’s creditors, vendors or employees.  

Nondisparagement

Like a confidentiality covenant,  a nondisparagement agreement is usually mutual, and frequently the subject of more negotiation than the parties expect it to be.   No party wants to be the target of derogatory statements from another party, but what one calls “derogatory” the other may consider merely factual.  Also like a nondisclosure provision, the parties may need or want to add specific remedies for a breach of this kind of covenant.

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BUSINESS DIVORCES:  Drafting the Resolution Agreement — The Single Essential Provision

Drafting the Resolution Agreement — An Analytical Approach posted last week proposed an analytical approach to take toward preparing a business divorce resolution agreement.

 This post identifies the single essential term every business divorce definitive agreement must contain and every business divorce agreement in principle or letter of intent must agree will be given:

MUTUAL RELEASES

There are at least eight good reasons to begin drafting this section of the agreement as early as possible:

  1. It’s a divorce.  The owners are deconstructing their business relationship and going their separate ways freed of (at least most) future obligations and liabilities to each other.  The mutual release provision functions like the judge’s order in a spousal divorce, terminating the marriage.
  2. Any owner not assured of receiving a release will refuse to sign a business divorce agreement.
  3. Determining the scope of a release requires understanding the owners’ respective asserted and unasserted claims against each other.  It also calls for a thorough review of the contracts between the owners (including the Governing Documents) as well as third-party contracts and entanglements.  For examples of those items, look at our post Some Common Legal and Business Issues. 
  4. Narrowing the scope of a release is more challenging.  Clearly, the parties ought not to be released from performing their covenants under the business divorce agreement. Governing Documents of the company may contain provisions (like indemnification) worth keeping in effect.  Preserving a releasing party’s contractual, contribution and similar rights against the released party if, in the future, a third party (particularly a governmental agency) sues the releasing party but not the released party can turn out to be critical.  It is possible that the effectiveness of a release or a portion of the release should depend upon the occurrence (or nonoccurrence) of a future event — a prime example being where the business divorce agreement has a deferred closing date.
  5. The releases must coordinate with the indemnification provision (if any) of the business divorce agreement.  They also need to align with other remedy provisions of the contract.  Sometimes, parties can waive legal or equitable remedies available outside of the contract; other times, not.
  6. The owners intend for the releases to be enforceable as written.  That means that the releases’ validity must satisfy applicable state and federal laws (including judicial interpretations).
  7. In many situations, the releases should be mutual but not reciprocal (or “the same”). Explaining that to different owners is usually challenging.  Getting them to agree to that difference can take time because it sounds unfair.  However, where the disparity between the owner’s management and knowledge of the company is widely different (as between a general partner and a passive limited partner) and is not eliminated through the business divorce process, identical releases might not be fair.  Where the owners and their related persons have different organizational forms (perhaps one is a trust and another an individual or a corporation), literally identical language in the releases could erroneously include or exclude someone as a releasing or released party.
  8. A well thought out release can serve as a useful roadmap for drafting the rest of the contract.

OTHER KEY PROVISIONS

A business divorce agreement, of course, must contain provisions other than mutual releases.  I plan to address some of those in future posts.

The releases, however, are the core of a successful business divorce agreement.  Therefore they are worth thinking about early in the process.

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BUSINESS DIVORCES:  Drafting the Resolution Agreement — An Analytic Approach

An earlier post discussed several different forms for a business resolution agreement.   This post suggests an analytic approach to take toward drafting a definitive agreement, agreement in principle or letter of intent relating to a business divorce resolution.   A future article will look at some essential provisions found in a business divorce agreement.

First, a Note about Some Other Kinds of Agreements

The form of business divorce agreements often resembles settlement agreements, asset acquisition and disposition agreements, severance agreements, spousal divorce property settlements or agreements incident to divorce, or a combination of all four.  Many lawyers may consider business divorce agreements also comparable with other kinds of transactional contracts, and they would probably be right, too.

The substance of business divorce agreements usually differs significantly from settlement, acquisition and disposition, severance agreements, and spousal divorce agreements (I will call those four kinds of contracts “Similar Separation Agreements”). 

 Similar Separation Agreements Can Spark Improved Thinking

An owner (and her lawyer) confronting a business divorce could help themselves think through the entire process by looking over a few Similar Separation Agreements in addition to reviewing available business divorce agreements.

For example, spousal divorce property settlements will reflect careful inventorying of the spouses’ assets and liabilities, especially when one spouse has a thorough knowledge of the assets and liabilities and the other has little.  Such is often the case in business divorces:  a general partner will possess far more information about the financial condition of the partnership than a limited partner.  Overcoming the informational disparity must be a top task for the limited partner and his attorney.

Settlement agreements for personal injury cases will contain broad release language and detailed provisions for the payment of the settlement amount.  Mutual releases are the core of a business divorce agreement.

Asset acquisition and disposition agreements offer an excellent guide for using representations and diligence investigations to establish informational parity among the parties.  The remedy provisions (including indemnities) and closing conditions highlight the importance of creating practical methods for verifying and enforcing honest disclosures.

Severance agreements with employees, officers, or directors address the importance of a having transition plan following the divorce.

 Similar Separation Agreements Can Mislead

An owner facing a business divorce should be careful not to follow Similar Separation Agreements slavishly when it comes to the substance of the agreement.   A well-prepared business divorce agreement resolves a matter that is meaningfully different from the situations underlying Similar Separation Agreements.

For example, the cause underlying a personal injury settlement agreement is frequently an event, often an accident involving unrelated persons whose only relationship is their involvement in that incident.  A business divorce requires peeling away the many layers of a volitional relationship broken by a multitude of conflicts over a long time.

The parties to a severance agreement are a company and an individual who has provided services to the entity.  The former continues on its path after the severance, while the individual has to find a different career path.  A business divorce involves a split among the company’s owners; the company will not continue afterward in the same way and may not survive at all.

Parties to an asset acquisition or disposition agreement may have no history with each other.   If they do, it is usually friendly or at least neutral.  They agree because one prefers to acquire a business and operate it in the future, while the other prefers to cash out and retire.   The contrasts with a business divorce are apparent.

Using Form Similarities and Substance Differences to Reach Agreement

Parties in a business divorce are untangling themselves from an existing relationship and a company agreement they entered into willingly in the past.  They are not confronting a single unpleasant incident but a dysfunctional relationship.

In preparing a definitive business divorce agreement, the forms of Similar Separation Agreements can serve as useful but incomplete checklists for navigating the business divorce agreement process.   Remaining mindful of how business divorces differ from the transactions giving rise to Similar Separation Agreements can make use of those checklists effective.

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BUSINESS DIVORCES: Keeping a Legal Inventory

A prior post in this series discusses the importance of knowing your BATNA in a business divorce:  your “Best Alternative to a Negotiated Agreement.”

Knowing your BATNA includes discovering it, understanding it, improving it, reviewing it, and revising it as circumstances warrant.

It also includes trying to keep up on your opponent’s BATNA, insofar as that is possible.

A portion of knowing your own BATNA and surmising your opponent’s BATNA is taking a deep dive into your legal rights  — and your legal wrongs. 

First, Try Putting Yourself in the Other Fellow’s Shoes

Before inventorying your legal rights in an upcoming business divorce, try to catalog your opponent’s legal strengths.  

You might start by rereading the company’s governing documents from her perspective.  Do not be surprised if you find some provisions you had forgotten about — perhaps because they favor her position.   You might also notice terms you had not fully complied with.

Proceeding to emails you sent her over the years might be the next stop.  Read them as the recipient instead of the author.  Observe how the sentences in those messages might appear to express slightly or even materially different meanings from the intentions you thought you had conveyed.

Your attorney will take these and similar steps, whether you do or not.  He will point out to you that in cataloging your opponent’s strengths in this way, you are also enumerating and beginning to realize your own legal weaknesses in the upcoming business divorce.

Your attorney will help you comprehend the potential legal consequences of your findings.

Second, Cheer Up!  Your Legal Position Probably not as Dreary as You Think

After you’ve performed the First Step, it’s time to list your legal strengths.  Your attorney will assist here, too.

Most likely, your attorney’s analysis will brighten your day.  He will identify and explain your legal rights and your opponent’s probable weaknesses.

Then you and your attorney will together organize a comprehensive preliminary outline of all of the legal strengths and weaknesses of every party and an initial analysis of how these points interact.

Repeat Steps One and Two as Needed

The first comprehensive outline and the initial analysis are only starting positions.  Throughout the process of a business divorce, you and your attorney will find new information that modifies or adds to the first outline of strengths and weaknesses.  Those changes, in turn, will cause revisions to the attorney’s analysis.

Another Example of Common Sense that Isn’t

Everything said above is practical common sense.  Except that it often isn’t, especially in a highly charged business divorce.

An owner quarreling with his business partner is usually like anyone else caught up in an angry dispute: overwhelmingly aware of how his partner has wronged him and correspondingly convinced of how he, therefore, must be in the right.  At first, that very natural reaction can render the owner incapable of seeing the facts objectively and fairly or of relating the facts accurately to his attorney.

A capable attorney should be able to help the client restore his sight.  Asking the client to explain how his opponent would view the conflict can sometimes help.

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