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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