This series focuses on “business divorce,” the break-up of a business between business owners due to disagreement or other circumstances. A business break-up leads to either one owner continuing the business without the other owner, the forced sale of the business to a third party, or a total dissolution or winding up of the affairs of the business. Because the situation can be contentious, it may lead to unnecessary litigation. Shutting a business is often not a viable option, so it may be better for one member to either buy out the other member or sell its stake to the other member. Thus, it may be good for business owners to think ahead, discuss, and consider preparing an exit plan where one business owner may exit sooner than the other, in effect like a business prenuptial agreement.
This will be a multi-post blog entry. Our earlier post discussed mediation as an alternative dispute resolution mechanism, and can be found here on our website — www.mcbrideattorneys.com. This eighth post discusses arbitration, another alternatives to resolving a disagreement or dispute if the Buy-Sell Option does not work for them.
Post 8 – Alternate Dispute Resolutions
Should the Buy-Sell Option not work for any reason, and when mediation is not an option, business owners may choose to submit the matter to arbitration. Arbitration is essentially an out-of-court settlement of a dispute between parties based on a judgment handed down by an individual or individuals, each called an arbitrator. Business owners can mutually select and appoint an arbitrator (e.g., industry expert in the field of the company’s business, or a neutral third party) who hears each party to the dispute, just like a judge in a court of law, before deciding on the outcome. In some cases, each party appoints their own arbitrator and a third arbitrator is appointed by the two arbitrators to ensure an unbiased decision. In an arbitration proceeding following a failed mediation, the same neutral mediator may also serve as an arbitrator, but it may also be a different person(s) presiding over the arbitration proceeding.
There are several potential benefits of arbitration for multi-owner disputes. Oftentimes, disputes are resolved more quickly, and more cheaply, than in court, because arbitration proceedings are not subject to the intricate court procedural rules. Parties to the dispute are allowed to select industry experts having better understanding of technical issues, enabling the dispute or disagreement to be resolved in a fair and pragmatic manner. Additionally, because court proceedings are open to public, it is often harmful to the business reputation and becomes adversarial in nature. In contrast, most arbitrations are private proceedings. Finally, once parties choose to resolve their disagreement or dispute through arbitration, the decision of arbitrators, known as arbitration award, is binding and enforceable on both parties and usually not subject to an appeal in a court of law.
That said, when all else fails, business owners may resort to litigation to resolve their dispute.
Our next post will focus on the litigation process and potential issues related thereto.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.