“The acute vulnerability of minority shareholders in the closely-held corporation is well recognized. It stems principally from two factors. Because of its controlling interest, the majority is able to dictate to the minority the manner in which the corporation shall be run. In addition, shares in closed corporations are not publicly traded and a fair market for these shares is seldom available.”
Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984)
At Lundy Beldecos & Milby, the heart of our practice is representing small but very profitable businesses including professional practices such as lawyers, doctors, and accountants. Helping these businesses grow and prosper is our mission and the measure of our success. Unfortunately, business owners do not always see eye to eye as the business grows, sometimes resulting in “business divorce”.
When relationships between business owners become strained, or openly hostile, the stakes are high. Not only for the business owners who begin to battle for control of the business, or seek to force a business partner out of the business, but also for the employees who depend on that business for their livelihood.
When the business owners go to war, there are usually a familiar set of complaints that arise about the other business owner or owners behavior. Those complaints typically include:
- Improper withholding of monetary distributions,
- Tax treatment that causes “phantom” income (taxes that must be paid on income not received),
- Restricting, precluding, or terminating an owner’s employment by the company
- Voting for and paying excessive salaries to a majority or the controlling shareholders.
- Withholding information regarding the operation of the company
- Misappropriation of company assets
- Failure to hold company meetings
- Exclusion of one or more shareholders from the corporate decision-making process
- Hiding money and taking improper distributions or paying improper expenses.
In small businesses, such practices may seem smaller and big or get overlooked for years but once the relationship deteriorates these complaints can form the basis of a protracted litigation. They can give rise to a variety of legal claims including:
- Breach of contract
- Breach of fiduciary duties
- Usurpation of corporate opportunities
- Shareholder oppression
- Demands for access to books and records
- Demands for an accounting
- Violation of restrictive covenants
- Trade secret violations
- Confidentiality breaches
- Demands for judicial dissolution
Once a company starts to come apart at the seams, it can look a lot like that iconic scene from Jerry Maguire where the competing business partners scramble frantically to secure the clients and employees. Nobody wants to be poor Jerry Maguire, leaving the successful business that they helped build, with nothing more than a goldfish and one employee and having to start all over with just one client.
With proper legal representation there are a variety of creative remedies that can be obtained for either side of a business divorce-whether you are a majority looking to rid yourself of an unproductive or combative partner or a minority owner who is being oppressed and precluded from enjoying your fair share of the company’s success.
Remedies for such behavior can take the form of monetary damages, disgorgement of profits, and accounting of the company’s financials, access to its books and records, a constructive trust, or injunctions to prevent your business partner from causing the business irreparable harm. If the company as constituted cannot continue to operate in accordance with its purpose as expressed by its operating agreement, a judicial dissolution may be available to dissolve the company. Further if shareholders forced out of the company they may be entitled to a fair value determination to ensure that they are receiving adequate compensation for their share of the business.
Eric Milby has almost two (2) decades of experience handling business divorce cases. He is a Member of the Business Divorce Subcommittee of the American Bar Association and has lectured on Business Divorce topics at the American Bar Association’s Spring meeting in San Francisco. He has also presented on Business Divorce with other panel members for the Pennsylvania Bar Institute. Finally, he is a contributing author on a treatise entitled Litigating the Business Divorce available from Bloomberg/BNA.