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.