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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