Can a Sale of the Entire Company be Forced?
What happens when one 50/50 owner wants to sell the business but the other does not? If the business partners cannot resolve their dispute amicably, could a court force the hand of the reluctant owner and compel a sale?
It is possible that one owner could come up with facts that constitute shareholder or member oppression, which could give the court grounds to force a buyout. Of course, it would depend on whether there was some sort of inappropriate conduct by the one who does not want to sell. But assuming that no inappropriate conduct exists, there could be another avenue. The issue of whether to sell could be considered a “deadlock” – at least in New Jersey – that could allow the court to appoint a provisional director. Such a court agent would hear the arguments of both sides and cast the tie-breaking vote. However, you must keep in mind that selling the company is a very big deal, and it may be difficult to convince a provisional director that it is in the company’s best interest to be sold.
Buying out 50% interest might not only be difficult, it might be impossible, and could even cause bankruptcy. There may be no valid business reason to sell – only the personal preference of the owner who wants out. While this could be a route to consider, it is by no means a slam-dunk that any court-appointed provisional director will side with you.
A much better approach is to deal with the issue up-front. A shareholders’ agreement (or operating agreement) could, of course, include a buy-sell provision. Even if it was not added when the business commenced, it could be added once the business relationship between the partners has matured. These agreements are critical to have; however, they often address one side buying out the other. One impediment to such agreements can be the same issue of payment – the parties could agree that it would be too expensive to commit to one side buying out the other.
One way to deal with this is to establish generous payment terms. Obviously, a large payout over ten years is vastly more affordable than an immediate cash-out. And there may be reluctance to be forced to sell the entire company. A compromise could entail being compelled to put the company up for sale, but only under certain circumstances. It could be after the passage of a certain amount of time or if certain financial benchmarks are met – or not. There are countless possibilities to consider.
One client with two 50/50 owners tied the future sale to the first brother’s retirement and chose nine years as the time after which either side could force a sale. They did not mind being bound to the company, but they did not want their children to be so bound.
Unfortunately, all too often the parties’ relationship becomes acrimonious and bitter, and they jump to litigation. Not only is that usually the costliest choice, but it can be damaging to the company, as well. While your business partner might not eagerly jump at the chance to amend a shareholders’ agreement and provide for the ultimate, future sale of the company, that option might be more palatable than current litigation. Be sure to consult with an attorney who can navigate you through all your options and help you avoid litigation by negotiating strategically. Please do not hesitate to reach out to me at dcroberts@norris-law.com.
About the Author – Business Divorce in NJ
David C. Roberts, Chair of the firm, specializes in complex commercial litigation, including fraud, trade secrets, and restrictive covenants, with a focus on business partnership and shareholder disputes in New Jersey. Known as business divorce litigation, these disputes often involve shareholder and LLC member oppression, embezzlement, owner freeze-outs, dissenter’s rights, and efforts to dissociate or expel an owner. Dave strives to resolve matters through mediation but is a seasoned trial attorney when needed. He frequently writes and lectures on minority shareholder disputes. With extensive experience representing both minority shareholders seeking buyouts and majority owners defending against such claims, Dave offers unique insight into the strategies and challenges of business disputes, particularly in family-owned companies.