The Causes of Conflict
Disputes between owners of a business arise for any number of reasons: perhaps the owners disagree about the direction of the company; or one owner has taken an unfair advantage of the other owners; perhaps the economics of the business causes strife; or owners may have personality conflicts with each other; or maybe there are just too many cooks in the kitchen. Whatever the cause, how these conflicts are managed is critical. Conflict poorly managed can result in the failure of a successful business.
Ideally, provisions should be built into the company’s formative documents to deal with these eventualities. For an S-Corporation or C-Corporation, these provisions will be built into the Shareholder's Agreement. In an L.L.C., the provisions will be built into the Operating Agreement. A proper Shareholder’s Agreement or Operating Agreement will anticipate foreseeable problems and provide a solution for these. Litigation can be avoided by providing dispute resolution mechanisms in the event that one of the proscribed problems should arise.
Among the more common types of provisions written into agreements to avoid litigation are buy-sell (or buyout) provisions. These provisions permit one or more owners to buy out the interest of other owner. This allows the remaining owners to continue running the business instead of going through litigation and risking a court ordered liquidation. The buy-out provision anticipates the eventuality of the death of an owner, or the divorce of an owner who is forced by the terms of the divorce to liquidate his share in the company. The price of the buyout can be predetermined by a set dollar amount or a formula depending on what is better suited for the owners and the type of business being run. In the case of the death of an owner, insurance can be utilized to offset the cost of the buyout.
If these anticipatory provisions do not adequately address the problem, then one or more of the owners may need to seek assistance through the courts. In the case where an owner has suffered malfeasance by another owner, a lawsuit for breach of fiduciary duties may be in order. Where there is lack of malfeasance, but where the owners no longer wish to work together, a lawsuit terminating the business (i.e. winding down) may be required. Perhaps a lawsuit enforcing a non-compete agreement is necessary for a departing owner.
Protecting You and Your Business
It is never too late to provide greater protection from internal disputes. A Shareholder’s Agreement or Operating Agreement can be prepared or amended at any time providing all shareholders or members can agree. Our lawyers at Platt & Westby, P.C., have been assisting businesses of all sizes for over forty years. We recommend scheduling an initial conference with one of our experienced business attorneys to do a liability audit for your business. We will make recommendations and quote a reasonable fee up front for any recommended work. Call us at 602-277-4441 to put our experience to work for your business.