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A Sealed Bid Auction May Be the Best Way To Resolve Disputes Between 50/50 Business Owners

When you started the company, both shareholders holding a fifty percent interest seemed like a good idea at the time.  That way, everything was equal.  Neither one of you answered to the other.  Neither could be “bossed around” by your business partner.  But, if you are reading this article after a Google search, you undoubtedly have learned, probably the hard way, of the potential shortcomings of this arrangement.

No one is really in charge.  Major decisions can’t be made if you aren’t in agreement.  If the two of you can’t find a way to coexist like you used to, what is the fate of your company?  Or, more personally, what is your fate?  Is your only option to stay in a business relationship that no longer works for you on a fundamental level?

There are many cases where litigation may be the answer, as in where you suspect your business partner has been embezzling, or diverting opportunities to a competing company that he started without your knowledge or consent.  Those are the easier cases to effect a separation, because the courts will protect the rights of 50% owners every bit as much as they protect those of minority owners.  But when no obvious, actionable “wrong” is present, and you simply want to separate, what to do if you both want to own the company?

There are many cases where separation is the only real answer, and both sides realize it.  In some cases, the business can actually be divided, with both owners taking half the assets and half the customers.  This situation is rare, though, and if it applied to your company, you probably wouldn’t be scanning the internet in search of an answer.

Neither of you wants to sell; you each want to buy out the other.  And no one wants to give in.  If your problems simply cannot be worked out because the relationship has been damaged beyond repair, then the obvious answer is to learn to live with each other, despite the issues between you.  However, if that is not an option, then your choices are somewhat limited.  You can obviously decide to sell the company, but then neither of you winds up with the business that you co-founded.  You could sue each other, which will make your lawyers happy, but possibly no one else.

Or, you could engage in a sealed bid process, an underutilized mechanism that is often the most fair, cost-effective answer.  An intermediary oversees the process, and you both submit bids that the other has not seen in advance.  The highest bidder gets the company.  Documents – preferably drafted by an attorney – must be signed in advance to make it binding, so that the losing bidder cannot refuse to proceed with the sale.  You agree in advance to as many terms as you are able, so the only issue to resolve is the share price you are both willing to offer.  When it’s over, a closing takes place and the winning bidder owns the company.  A regular auction, with bids continuing until one of you drops out, might also work, but the sealed bid prevents both of you from letting the emotion of the moment get the best of you and bid an amount higher than you really are prepared to pay.

The advantage of this process is, neither side is “giving in.”  Both sides have an equal chance of winning.  And your fate is entirely in your own hands.  If you want the company badly enough, then bid enough to win.  If your partner outbids you, and pays more than you were willing to pay, in a way, you still win.

Although there is no guarantee that everyone will be happy with the result of such a process, I can guarantee that I know several litigants who engaged in very expensive shareholder dispute litigation and who, at the end of the day, wished they had listened to this suggestion in the first place.

If you have any questions about this post, or other related matter, please email me at dcroberts@nmmlaw.com.