Corporate Divorce: What Business Owners Need to Know

corporate divorce Nov 18, 2021
Corporate Divorce

A common recipe for business partners parting ways, also known as a “corporate divorce,” generally originates from three issues: (1) differing approaches to financial decisions, (2) differing visions of the future direction and growth of the company and (3) an external “trigger” or third-party event

 

Business partners may have differing views on company growth, such as how to fund the growth through either the raising of capital or further borrowing. The manner in which the growth should occur, a new product or service, or even a new industry or geographical territory to explore could all be areas that cause friction.

 

Financial issues tend to be the primary factor. For example, some owners may feel as though the company credit card is their personal one. This behavior carries the risk not just of splitting up the business, but also opening-up shareholders to the risk of being found personally liable for the debts and liabilities of the corporation.

 

Failure to follow corporate formalities, such as ensuring proper checks and balances surrounding financial and non-financial matters, is a divisive issue – especially when one business partner strictly adheres while the other turns a blind eye. Generally, organisations will have corporate documentation depending on the type of company (i.e. articles of association, partnership agreements, and shareholder agreements), which will lay out the constitution for the company and how it should operate. One party operating outside of this constitution or against a wrongly perceived assumption can lead to a corporate divorce.

 

If you and your business partner have taken all the necessary precautions and a split is unavoidable, the next step is to determine what happens to the business post-divorce. In the event that a party has a minority interest, the business will likely be impacted much less than if the ownership is a 50/50 split. Let’s say two partners who are joint directors have shares in a company. Director A owns 60% and Director B owns 40%. In this case Director B would theoretically have less authority or power to run the business compared to Director A, whose controlling interest could override Director B’s minority position in passing ordinary resolutions. Please note this is an ordinary resolution. A special resolution requires a 75% majority so if partners don’t agree, then effectively you could have a stalemate position. If the entity is 50/50 in ownership and/or management control, there may be a deadlock, preventing the company from taking further corporate action. This will significantly impact the day-to-day operations of the business.

 

Potential next steps could include a purchase of the ownership interest of the individual leaving by the remaining owner(s) or even by an approved third party in the marketplace. The manner and process to allow for the purchase should be explicitly provided in the business’ corporate documentation. If the documentation is clear and conspicuous, then the dispute could shift to the value associated with the ownership purchase, taking into account the remaining owner desiring to pay less compared to the owner who is leaving wanting the highest price for their ownership interest.

 

Potential resolution options include an out of court workout, mediation, litigation, or bankruptcy, or even an acquisition of the business assets or ownership interest. Reacting as quickly as possible once the decision has been made to split will help assist with reducing professional fees, the disruption to the business workflow, and the emotional anguish that comes with a corporate divorce. Whatever the business or no matter how small, where you enter into business with another person, even a spouse or family member, consideration should be given to putting a shareholder agreement in place at the start of a business venture, thereby avoiding any nasty corporate divorce.

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