What Is a Business Divorce?

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Article By: Miller Law

A Leading Commercial Litigation Firm in Michigan
Published on: January 20, 2022
explaining a business divorce

People enter into small business partnerships based on a common interest and a common vision. But these halcyon days almost always pass and difficulties arise. 

Conflict arises most frequently from disagreements on future course, a failure to uphold obligations, being “oppressed” as the minority owner, or one business partner acting in bad faith to harm the business.

At that point a business divorce may be imminent. 

Not surprisingly, business divorces happen among small businesses more frequently than not. One owner of a business decides that they no longer want to be in a partnership with the other owner.

At that point of realization, the practical aspects of how to protect all your investments in the business while separating from your business partner takes priority. In this guide we will discuss the real difficulties of a business divorce and how to best navigate them. 

Corporate Divorce Examples

So you’ve found that you and your business partner can no longer work effectively together. The most common reasons for this breakdown are:

  • Vision differences—a business partner disagrees on the future of the business;
  • Loss of interest—a business partner is not pulling their weight and is otherwise not engaged;
  • Ownership oppression—a business partner with an minority ownership has their interests adversely affected by majority ownership; and
  • Bad faith/operational paralysis—underlying tensions have erupted into a willful desire by a business partner to destroy the business through inaction or worse.

Obviously, other situations can also lead to conflict and division. It’s advisable to consult an experienced business lawyer to help you discern whether you truly should start a business divorce.

Know What Is at Stake and Chart Your Path Carefully

In considering a business divorce, no less than the goodwill of your business, its solvency, and your economic security could be at stake.

Further, once you step onto this path, reversing course may be impossible. We therefore encourage you to consider the following questions.

What Is at Stake?

Careful consideration of what is involved and what could happen to your business in a corporate divorce is paramount. Be aware that business divorces are similar to matrimonial divorces in that they are unpredictable and messy. Given that you and your partner have invested a great deal of your personal talent and fortune into the business, any corporate divorce can lead to acts of emotion, ego, acrimony, and bad faith. All of these ingredients are primed to derail any well-laid plans.

Further, reflect carefully on the fact that the divided parts of a business are almost always less than its former sum as a going concern. Knowing exactly what you want in a business divorce is essential—including whether permanently dividing the business is your true goal.

What Is Your Goal?

The majority of individuals who seek legal counsel cannot articulate their goal. In a business divorce, not knowing your goal is especially dangerous because of the potential volatility of the transaction itself.

Extremely adversarial situations like a business divorce can lead to “mission creep” (e.g. you first intended to reorganize the management, and now you’re facing judicial dissolution). You must identify a clear goal for your business divorce to avoid mission creep. As a guide, consider the following common corporate divorce goals:

  • Total division of the business—the assets are divided and distributed to you and your partner and the business is dissolved;
  • Realignment—if the current management model is not working, you may each need to adopt new duties and responsibilities or cede management to a hired third party (e.g., a president, manager, executive director, etc.); and
  • Buy-out—you or your partner buy the other out and keep possession of the business as a going concern.

While not exhaustive, the above represents a starting point for the most common goals of a business divorce. We encourage you to discuss these options with your business lawyer and any alternative goals you might have in mind. Further, having a clear goal will help focus discussions, temper emotions, and streamline efforts.

Where to Start the Business Divorce?

Having identified a goal, you now need the mechanisms to achieve it. These mechanisms are grouped into three general categories:

  • Existing internal and governing agreements;
  • Michigan law (i.e., the statutes and courts); and
  • New agreements (i.e., when no agreements exist or Michigan law is not practical/applicable).

Frequently a mix of the above options results in an effective business divorce. 

Existing Agreements

The best case scenario consists of using internal existing agreements to bring about the business divorce. Commonly applicable agreements include:

  • A business’s governing documents (e.g., bylaws, operating agreement, or partnership agreement);
  • A shareholders agreement (for corporations) or buy-sell agreement (for limited liability companies and partnerships); and
  • Employment agreements.

We will discuss each one of these briefly, but we encourage you to seek skilled and experienced legal counsel to dig more deeply into the way each may complete a corporate divorce.

The governing documents sometimes outline methods for an owner (i.e., shareholder, member, partner, etc.) to dissociate from a business. Dissociation can be either by election by the owner wishing to dissociate (i.e., a “put” option), or by an owner desiring to remove another owner (i.e., a “call” option). 

A put forces one owner to buy another owner’s interest. A call forces one owner to sell their interest to another owner. Shareholder agreements and buy-sell agreements more frequently contain provisions for puts and calls, or otherwise control how owners can divest themselves, or be divested of, their ownership interest in a business. Finally, employment agreements between one owner (as an employee) and the business may provide for a mechanism to not only remove the owner as an employee but also remove them as an owner of the business.

Written agreements provide a clear path forward and objective mechanisms for valuation, payment method, and timing. Often these agreements are years old and need to be reread for their guidelines and mandates.  Be sure to verify the existence or non-existence of any business agreements. Often these agreements outline the best way through a business divocre.

Michigan Law

Bringing about a corporate divorce through the Michigan statutes can be both handy and clumsy.

Therefore, first identify if your situation fits the narrow circumstance where Michigan statutes properly apply. There are several laws within the Michigan statutes that deal with owners’ rights when operation of the business is in bad faith, oppressive, or otherwise injurious to the business or its owners.

We encourage you to consult a business attorney to explore any statutory or judicial tools to complete a business divorce in your specific situation.

New Agreements

Often there are neither internal business agreements that are helpful nor Michigan law that is practical or applicable for achieving your business divorce. It is necessary, at this point, to engage skilled and experienced legal counsel.

This third option attempts to tap into the self-interest of each business owner together with their desire for legacy, wealth, and success. Here a counselor at law fosters goodwill and willingness from the adverse parties to engage in a mutually beneficial resolution. While there is no legal “hammer” or contractual provision to use, a business lawyer steeped in years of experience in business governance and management together with business litigation experience may be able to coax the other side through an impasse by appealing to self interest and personal pride.  When that willingness is achieved it should then be reduced to a transaction involving:

  • A written agreement reflecting the business divorce (e.g. buy-out, winddown, dissolution, etc.);
  • Ancillary agreements (e.g. non-compete, non-disclosure, assignments, etc.); and
  • Payment and closing (e.g. promissory notes, UCC filings; disbursement statement, etc.).

This option seems soft and uncertain, yet it is usually the most frequent starting point for business owners since written internal controls are often not adopted (i.e. bylaws, buy-sell agreements etc.).

Miller Law Firm Knows the Way

With decades of experience in counseling businesses and untangling internal business disputes, The Miller Law Firm’s business attorneys know the ins and outs of business law and disputes among shareholders, members, partners, and owners. Allow us to bring to bear our wide and deep experience to help resolve your business divorce. Contact us today for a consultation.

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