This author is not a big fan of fighting sports, but the news of the sale of the Ultimate Fighting Championship (“UFC”) in early July was hard to miss. Nay, it wasn’t the eye-popping price tag ($4 billion) attached to the sale of the company to a group led by talent agency WME-IMG, which the media says is the largest deal in the history of professional sports,[1] but the way the former majority owners, Lorenzo and Frank Fertitta, agreed to settle disputes.
We have covered business partnership disputes and deadlocks before. In our early blog series on Business Divorces, for example, we discussed situations where disagreements may arise and ways to resolve them, such as buy-sell and mediation. UFC being UFC, though, the Fertitta brothers, 50/50 owners prior to the sale, are said to have had a highly unusual dispute resolution mechanism. When their lawyers recommended inserting a clause in their partnership agreement to allow them to settle disputes, the brothers reportedly decided to do “three five-minute rounds of jiu-jitsu, sport jiu-jitsu, which is points-based, with UFC president Dana White as the referee.”[2] Happily, the brothers did not have to resort to that method and it seems like the brothers’ efforts bore fruit when they sold the company they bought in 2000 for $2 million for $4 billion.[3]
For those who prefer less dramatic dispute resolution mechanisms without going to court, there is no shortage of options. You can designate a tie breaker in your governing document so as to avoid deadlocks and attendant business disruptions. This can be someone internal, such as an officer or director of the company. One potential problem with an internal tie breaker, though, is that he or she may not be free from undue pressure from the deadlocked parties and, thus, not so independent. Alternatively, you may want to consider designating an independent expert or mediator. As we explained before (here), in mediation, parties work collaboratively with a trained impartial third person who assesses the conflict situation and helps reach a settlement. Your business association, such as a local chamber of commerce, or the Better Business Bureau, may have a mediation program tailored to small businesses, or your business attorney may be able to help you find one who is familiar with working with business owners. While hiring a third-party mediator is not without costs, mediation is a more efficient and less expensive alternative to litigation (or arbitration) in most cases.
When mediation fails, business owners may want to consider arbitration. As we explained before (here), arbitration is an out-of-court settlement of a dispute based on a judgment handed down by an individual or individuals, each called an arbitrator. The benefits of arbitration often (but not always) include quicker and cheaper resolution than in court, the private nature of the proceedings, and the fact that parties to the dispute may retain some control over the selection of the arbitrator(s).
For those business partners who just cannot resolve their differences and decide to split up, buy-sell may be in order. We mentioned (here) that buy-sell involves one business owner proposing to buy the ownership interest of the other business owner(s), resulting in the removal of the selling person as the co-owner of the business. A properly drafted governing document for multi-owners usually spells out situations where a buy-sell option may be triggered (e.g., deadlock over certain matters), the type of buy-sell mechanism, which comes in many different forms and colorful names (e.g., shotgun/Russian roulette, Texas shootout, Dutch auction, etc.), and some sort of predetermined formula or method for determining the buyout price.
Whatever you choose, as always, it is best to plan ahead and put it in a well-drafted document tailored to your specific needs.
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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.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
[1] Forbes, UFC Sold to WME-IMG: What’s Next for the Fertittas, Dana White, Joe Rogan, Ronda Rousey and Others? (July 12, 2016), http://www.forbes.com/sites/mattconnolly/2016/07/12/ufc-sold-to-wme-img-what-happens-to-the-fertittas-dana-white-joe-rogan-ronda-rousey-and-others/#282c30e177a5.
[2] Inc.com, The UFC Sells for $4 Billion: Partners Were Legally Bound To Settle Disputes by Actually Fighting (July 11, 2016), http://www.inc.com/jeff-haden/ufc-sells-for-4b-partners-were-legally-bound-to-settle-disputes-by-actually-figh.html.
[3] Id.