50/50 Ownership Relationships can be Trouble, Plan Ahead

Two individuals owning a business 50/50 presents a number of challenges, particularly when personal or business interests diverge. Disagreements and disputes between partners is inevitable and business divorces are not uncommon. Splitting a business can lead to significant frustration. If neither owner is willing to sell their interest to the other or to a third party or the parties cannot agree on a valuation, deadlock can result.

Disputes between partners often spill outside the boardroom and can have a negative effect on employee morale, operations and productivity, and customer and supplier confidence. When deadlock sets in, parties often turn to the courts to resolve the dispute. Litigation is not a panacea, however. Lawsuits can result in years of stalemate before a court may order the sale of business assets and dissolution of the company. During this time, performance of the business may suffer with very high levels of stress on the owners.

Where court-ordered dissolution is requested by one of the owners, the other owner often makes the argument that the requested remedy is an extreme measure that would “kill the company” resulting in lost jobs and dissipation of value. Another tactic if dissolution of the business in inevitable is to request the appointment of a custodian. Having a custodian appointed may, in fact, preserve the business’s profitability, even though that business may ultimately be owned by someone other than the current owners. However, a custodian does have the ability to choose a sale mechanism that allows the current owners along with third parties bid for the business.

Many of the best business divorce lawyers strive for the parties, often through their attorneys, to negotiate and ultimately enter an order containing the terms of a purchase agreement. These orders avoid the cost of a trial and allow the owners to retain control over the process, which they lose when they let the court make the decisions. These orders often contain provisions for proof of financing and a mechanism for determining the price of the business. In addition, the order may also provide for the appointment of a neutral to facilitate the completion of the sale.

The advice that “50/50 relationships can be troublesome” is sage advice. Experience should lead partners and counsel to consider methods of resolving disputes in advance. Co-founders are advised to take precautions when signing a partnership agreement, even if they are afraid that discussing the issue of disputes will sour or nix the deal. One method is to identify a neutral that will break the deadlock, although this procedure often leaves one owner dissatisfied and is only a temporary fix. Another solution is to detail clear procedures for valuing and selling a partner’s interest.

An often utilized method for breaking deadlock is called the “shotgun” or “shoot out” approach. A shotgun provision can be included in the partnership agreement or the parties can offer it as a method for resolving dissolution litigation. Under the shotgun approach, one party specifies a price and the other party chooses whether to buy or sell at that price. Partners often find this approach preferable to protracted litigation or having a court decide for them.

Our Chicago partner and LLC member dispute attorneys have litigated business divorce, stolen corporate opportunity, breach of fiduciary duty, and shareholder oppression lawsuits for more than three decades. We have prosecuted and defended LLC member or shareholder squeeze-out and freeze-out cases in a wide variety of business contexts. We spend considerable time going over all the business and accounting issues to develop a comprehensive strategy for prosecuting and defending the claims that arise in the case.

Serving clients in Chicago and beyond, our business litigation attorneys have acted as lead counsel in accounting actions including a complex dispute involving tens of millions of dollars in damages that was resolved through an extended multi-year trial where we worked closely with the accounting and damages experts to develop winning strategies. We also have a great deal of experience finding accounting irregularities with assistance of forensic accountants and then locating and interviewing witnesses to confirm those irregularities. We then present them to the court in plain and clear manner so that our client will have the best chance of succeeding. Having worked with many different accountants we have developed successful strategies for presenting the complex accounting and capital structure issues in a manner that portrays our client’s position in the best manner to the court. We offer free consultations to let business owners, shareholders or LLC members decide if we are the best attorneys to represent their interests in complex shareholder or LLC freeze out litigation. We take the time to learn about your business and the issues it faces and let you decide if we are the best qualified lawyers to represent you. To set up a consultation with one of our Chicago LLC member dispute attorneys and Chicago business trial lawyers, please call us toll-free at 630-333-0333 or contact us online.