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 highlighted arbitration as an alternative to the Buy-Sell Option available to business owners, and can be found here at our website — www.mcbrideattorneys.com. This ninth post discusses litigation as the final option business owners have to resolve a disagreement or dispute where all the other options fail.
Post 9 – Litigation
Should neither the Buy-Sell Option nor mediation nor arbitration work for business owners considering a business divorce, litigation may be the last resort.
Litigation is initiated by filing a petition (or a complaint) in a court having proper jurisdiction. The petition outlines the plaintiff’s cause of action and the relief sought, usually monetary damages or specific performance of an act by the defendant or both. The defendant then files an answer (or a reply), denying in whole or in part, stating its grounds of defense, and pleading other matters that are necessary for proper defense and relevant to the case
Typically, the next stage in litigation is discovery of evidence where each party obtains from the other party certain documents and information to support its claims. In the U.S. legal system, discovery is often the most time-consuming, and costliest, part of litigation, and can take months, if not years, to complete. During discovery, parties may try to dispose of some or all issues, by filing a motion with the court, when it is clear from the evidence that one party will be unable to conclusively prove its claim or defense and, thus, further proceeding would be pointless. Frequently, parties may also try to resolve their issues by reaching a settlement agreement when they realize that prolonged litigation would not be advantageous to either party.
If the parties have not disposed of all the issues or reached a settlement by the end of discovery, then the case goes to trial. Parties present their case before a judge and a jury (or, in bench trials, a judge only) based on evidence collected during discovery. Subsequently, the jury (or the judge) determines questions of fact and passes a verdict in favor of either party and the court enters a judgment. The losing party may request a new trial based on any alleged error on the part of the trial court and/or file an appeal to a higher court.
The disadvantage of litigation is primarily the time and cost involved. Because litigation requires following certain procedural steps, it may be quite time-consuming for parties to arrive at a resolution of their dispute and costly to hire counsel to represent them at different stages, depending on the issues involved. This may be particularly problematic for business owners who, despite disagreements and a desire for a quick break-up, must continue the uncomfortable coexistence. Additionally, litigation, by its nature, is uncertain and does not guarantee an outcome that parties want.
It is, therefore, prudent for business owners to think ahead, discuss, and prepare a Business Prenuptial where one business owner may exit sooner than the other business owner.
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.