Taking Matters Into Your Own Hands to Prepare for Business Divorce Litigation Can Backfire
A common approach for oppressed minority shareholders seeking to prepare themselves for business divorce litigation is to start taking affirmative action to build a case.
In fact, I tell clients to do this all the time, but only with careful guidance.
How to Prepare for Business Divorce Litigation
Tactics can include recording conversations and, depending on the circumstances, copying documents. (PLEASE check with an attorney before recording a conversation, because even if you are in a state that allows one-party consent, like New Jersey, you are violating the law if the other party to your phone call is in a two-party consent state, like Florida.) However, some clients start taking what they perceive as defensive actions, but go too far.
I have written in the past about successfully kicking a member out of a New Jersey LLC (called “dissociation”). This is a tactic used against a New Jersey LLC member who is actively harming the company.
On more than one occasion, though, an LLC member who felt he was the victim went too far in setting up the majority owners for a lawsuit and wound up on the defensive end of a suit for member dissociation.
An Example of a Shareholder Dispiute
One LLC member felt it was a good idea to start calling company customers and warning them about wrongdoing by the majority owners. While there could potentially be a time when this might be a good idea, this case wasn’t it.
The majority members sued the minority member for dissociation, claiming that the phone calls to customers were intended not to provide any benefit to the customer, or to help the company in any way, but merely to put pressure on the majority owners to buy him out at a fair price.
The client likely settled for a buyout that was below what he would have received had it not been for his actions taken before the suit was even filed (and before he consulted with me).
How to Proceed with a Business Divorce
If you believe you are being oppressed and marginalized by your business partners, don’t take matters into your own hands, no matter how well-intentioned you may be.
First, consult with an attorney experienced in business divorce cases and ensure your short-term tactics match your long-term strategy.