Attorneys often use the phrase “business divorce” to describe when business partners can no longer get along and want to be legally separated from each other, or at least one of them does.
But what happens when, like divorcing parents arguing over child custody, no one can agree who should wind up with the company? This issue arises more often when there is equal 50/50 ownership, but can also exist when a minority shareholder does not want to be bought out but instead wants to do the buying.
What Should I Expect During a Business Divorce?
Unlike in a martial divorce, where fault need not be shown, New Jersey law requires that someone must be deemed the “wrongdoer” for the court to grant a business divorce. But that determination does not necessarily dictate who will end up with the company. For example, when a one-third or 25% owner is found by a judge to be an oppressed minority shareholder, the typical remedy is to be bought out, not to be the one buying out the majority. But if the facts enable you to convince the court that it is in the company’s best interest for you – the oppressed minority owner – to be the buyer, then the court has the power to order what is called a “reverse-buyout.”
Facts that the court would consider in determining who should buy and who should sell can range from who has the most experience to who has the true customer and vendor contacts and employee loyalty. Ultimately, the court is going to consider the jobs of all the non-owner employees and attempt to determine who is in the best position to keep them in existence. If a 10% owner can make an argument that the company’s only chance of survival is for her to buy out the 90% shareholder, the court might be convinced to force the majority to sell.
When the oppressed minority owner is a 50% shareholder or member, it is easier to make the argument that he should be the buyer. However, the court will still look to the best interests of the company and the employees. Just because you are the victim of wrongdoing and you own every bit as much of the company as the wrongdoer does, that does not mean the court will automatically force the oppressor to sell. The majority owner could have been hurting your interests for years, yet still, be the person most likely to keep the company afloat well into the future.
How Do I Start the Legal Process?
When you sit down with an attorney to discuss possible shareholder dispute litigation, the first thing your attorney should determine is, what is your ultimate goal? Do you want to be bought out? Do you want to be the buyer? Do you want to negotiate a “peace treaty” that you can all live with, or even determine whether such a lasting peace is even possible? The answer to this question should determine your entire strategy going forward.
If you have any questions about this post, shareholder disputes, or any other related business law matters, please feel free to contact me at firstname.lastname@example.org.