Business Break-Ups and Disputes between Owners

Business breakups of private corporations, limited liability companies (LLCs) and partnerships are common. Perhaps an owner wants out because he sees a better opportunity elsewhere. Perhaps owners can no longer agree or a non-productive owner needs to be removed. Perhaps there are concerns about improper management or unfairness towards a minority owner. Regardless of the reason, Smyth & Mason can help.

Don’t Go It Alone!

Our primary recommendation in this area is “don’t go it alone”. Analysis of what remedies are available and how to achieve them should begin with review by an experienced lawyer of two important sets of documents: the governance documents of the business (like articles and by- laws) and, importantly, any existing agreements between owners, such as shareholder agreements and operating agreements. The law gives great deference to the agreements owners make with each other. Owners need to understand the legal impact of those agreements before acting and to develop a strategy consistent with them. There may be a mediation requirement that first needs to be satisfied. There may be an available remedy under a buy-out clause. Failure to take these agreements into account can make a problem much worse.

In addition to governance documents and ownership agreements, sometimes (but not always) the law provides that owners have fiduciary and other duties to each other under state Corporations or LLC Acts or the common law. This is particularly true of owners who are actively engaged in management of the business. But owners also need to understand that state rules on business judgment give owners a great deal of latitude to make decisions even if they are not profitable or seem unfair. We help owners understand what types of conduct cross the line into breach of contract or a violation of a legal duty.

There is also a very real emotional component to these cases. Sometimes, break ups occur within a family owned business, and pit siblings against each other or their parents. Sometimes, the business owners began as friends and now feel betrayed. We have experience with these dynamics and understand how they can play out in negotiation, or, when necessary, litigation.

For decades Smyth & Mason has successfully represented every side in business break-up disputes.  These disputes range from small business with a few owners to large businesses with many. Our philosophy is consistent:  first we identify the parties’ real goals and motivations, then we strive to achieve a negotiated resolution, and only after the latter fails, we resort to litigation where warranted.

Here are some examples of legal issues in business break-ups that we see at Smyth & Mason:

• Law firm separations, including partner departures or expulsions
• Owner derivative actions, to cause a company to stop illegal behavior
• Minority owner “oppression” claims
• Receivership petitions in the event of owner misconduct or impasse
• Dissolution actions
• Limited liability company member disputes
• Stock or other ownership interest fights
• Noncompetition and confidentiality covenant enforcement actions
• Disputes about theft of business opportunities
• Disputes over dilution when new capital is raised
• Disputes over buy-outs, including fights over valuations
• Officer and director terminations

In the break-up context we have been engaged to represent numerous small and medium size businesses, Washington law firms and lawyers, national retailers, national distributors, apartment and condominium developers and owners, construction contractors, high-tech investors, media and software companies, international management consultants, and manufacturers to name only a few.  We are proud of our record resolving break-up disputes for our clients, whether achieved through negotiation or in the courts.