Articles, Newsletters and Advisories
(by Kevin K. Douglass)
Many closely-held business owners successfully ignore disagreements with co-owners for years or even decades. Understandably, there is always a more pressing and important business matter that merits immediate attention. Also, particularly in family-owned businesses, contentious issues may be “overlooked” to preserve family harmony. Unfortunately, issues that fester for years can suddenly and dramatically spiral out of control and result in expensive, harmful and sometimes embarrassing litigation. Even after litigation is threatened or commenced, or a controversy between owners otherwise escalates, business owners should remain open to the possibility of resolution through means other than litigation. These options, including mediation, are available for co-owners to address contentious issues quietly, economically and with dignity.
Recognizing There Is a Problem
A common refrain among business owners is that they were “blind-sided” when a co-owner turned aggressive, hired an attorney and began making demands that soon led to litigation. It can sometimes be difficult to pinpoint the underlying reasons for the disagreement and the triggering event that causes the controversy to bubble to the surface. This is especially true when owner animosity or even anger makes it more difficult to fully understand and resolve the underlying problem.
From a legal standpoint, even before a conflict arises, it is important to analyze the rights of each owner, including the terms of applicable agreements and documents (e.g., shareholder, partnership or operating agreements, employment agreements, buy/sell agreements, by-laws, minutes, confidentiality and noncompete provisions), as well as the statutory and common law rights each may have. It is not unusual for disgruntled owners to raise a myriad of complaints and claim damages for alleged injuries suffered directly by the owner or derivatively to the business itself. The possible allegations may include the breach of the terms of the various agreements between the owners, lack of communication and information flow to minority owners, failure to comply with governance requirements (including the failure to hold meetings and votes), the failure to pay dividends or make distributions, unfair salary levels and compensation, buyout issues, mismanagement (including usurpation of company opportunities by a controlling owner), the failure to address succession issues or adopt the right succession plan. In addition, there may be genuine disagreement over the strategic direction of the business, company financial goals and expenditures (including the tension between those favoring distributions and those who want to invest in the business). In short, the list of possible complaints and issues is nearly endless.
Identifying the Issue
When disagreements manifest themselves before litigation, there may be a real opportunity to try to resolve the underlying issues quickly. The odds of a resolution improve if the owners and/or their counsel have a solid understanding of the interplay between the legal, business and personal issues at stake. As to the legal issues, in assessing owner rights and obligations it is important to have an understanding of the company governance structure (ownership percentage, officers, directors, managers, etc.), terms of applicable agreements, as well as some consideration of possible claims and counterclaims. It is also critical to understand the business both operationally and financially and how those conditions may impact the legal analysis and the dynamic between owners. Finally, an often overlooked component is the history of the personal and professional relationship between the owners, or lack thereof.
Considering All Possibilities for Resolution
Many owners may not have fully thought through exactly what they want, what their options are and whether their expectations are realistic. Understanding these options and each owner’s goals and objectives can be invaluable to ensuring that all possibilities for resolution are considered. An owner should be challenged to think critically about the key legal, business and personal aspects of the issue to help expand the options for reaching common agreement. Do the owners want to continue together in business or should they consider separating via a buyout? Do the owners need to redefine the company ownership and governance structure? Do the owners share the same vision for the company’s future? Are new leaders and investors needed? Is a strategic plan or succession plan in place or should one be developed? One or more of these questions may need to be considered, along with a multitude of others depending upon the disagreement and challenges faced by the owners.
Working Toward a Resolution
Under the right circumstances, a proactive and adept owner may be able to objectively analyze competing issues, identify the crux of the conflict and address and resolve the matter directly with the other owner(s) without further drama. However, in most cases, and particularly when complex issues, frayed relationships and lost trust are part of the owner dynamic, it likely makes sense for owners to consult with an attorney to obtain an objective and professional perspective before determining the best course of action. Although the owners may reflexively reach out to the company attorney for help, they should think through whether the advice of a more objective “outsider” makes sense given that the company attorney may have a conflict of interest.
The role of counsel may simply be a “behind the scenes adviser” if it makes sense for the owner to directly address conflicts with their co-owner(s). Alternatively, an attorney may be able to better assist as an active participant in pushing discussions and negotiations forward with the other owner(s) and their counsel. However, there are many circumstances where interplay between the different owners and their counsel results in an escalation of an already tense situation as each side strongly advocates for their position.
The Mediation Option
Mediation is underutilized alternative to resolve disagreements between owners of closely-held and family-owned businesses that arise before litigation. A thoughtful mediator who is familiar with closely-held business issues is often best suited to work with the company owners to achieve a resolution satisfactory to all parties. An adept mediator can assess and adjust their style to adapt to the circumstance by moving between a facilitative and evaluative approach to ensure the best opportunity for success.
Even after litigation is filed, there is always an opportunity for an effective mediator to assist the parties in finding a solution. The filing of a lawsuit obviously raises the stakes considerably, but over time, the experience of protracted and expensive litigation may ultimately serve to nudge entrenched parties to the bargaining table. The intense emotions that exist when litigation is initially filed, often give way to “litigation fatigue.” Mediation presents the possibility of a “win win” scenario for both parties (while avoiding the possibility for both parties of an outright loss in litigation) and may offer an attractive alternative to “all or nothing” litigation.
In short, closely held business owners and their counsel should remain open to the possibility and promise that mediation is a powerful tool that, if successful, can be the key to resolving complex disputes between co-owners, saving the parties money, preserving the business and even restoring harmony to the family or co-owner relationship.
Kevin Douglass is a shareholder in the Babst Calland Clements and Zomnir’s litigation and energy and natural resources groups. He focuses his practice on litigating complex commercial matters in a variety of forums including federal, state and bankruptcy courts.
For the full article, click here.