It’s the Wednesday afternoon before Thanksgiving and the phone rings with a new client. The situation in the office has become an emergency. Either someone has been locked out or someone needs to be locked out, or someone is walking out the door with a key client. Many of our cases begin as emergencies.
The dispute between LLC members, shareholders or partners erupts into a lawsuit without warning, or so it seems, and without planning. Here are five considerations that are important to success in a litigated business divorce.
1. Understand the Statutory Framework.
Different types of businesses may be treated the same for taxes – partnerships, S Corporations and limited liability companies – but they are very different creatures when it comes to disputes between the principal owners. The “default rules” for issues that have not been addressed in the business organization documents are very different, and the liability of individuals can be widely different.
A couple of examples should give you an idea. The limited liability company and partnership statutes in many states contain provisions that permit the expulsion of a troublesome member or partner. There are standards that have to be met, and they are significant, but the member or partner who makes it nearly impossible to continue the business with their participation can be tossed out.
Not so with the close corporation. Most statutes permit the minority to demand the purchase of his or her shares if the majority has acted oppressively, but not the other way around. If the majority doesn’t have the votes to fire or remove a shareholder, they may be stuck with that person.
Most partnerships and limited liability statutes have a minority veto built into their structure. Unless it was previously agreed, you cannot change the basic operating documents – the partnership agreement or the operating agreement – without the consent of all of the members or partners. Corporations on the other hand can usually operate with a majority vote and can change their by-laws or certificate of incorporation.
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