While most business leaders are visionaries, focused on short- and long-term objectives to establish and develop a thriving business, many may not have the foresight to take (or choose to delay or avoid taking) key steps that can help them prevent conflicts, disputes, and irreconcilable differences with their co-owners, partners, and key employees or agents that often lead to costly litigation.
Here are six ways that business owners can keep the chances of a disruptive and destructive business divorce to a minimum:
1. Determine The Form of Entity that Your Business Should Adopt
All businesses should operate in some recognized format and structure, such as a corporation, limited liability company (LLC), “series” LLC, general or limited partnership, or even an association. Several factors will drive the choice of business structure, such as assuring limited liability for equity owners, insuring creditor protection, the laws governing the type of business and/or its operation, tax, pension, and insurance factors, union elements, and organizational or family hierarchy. These same factors may also lead to the decision to establish multiple entities to operate the business and its component sub-operations, such as forming a holding company with operational subsidiaries, a parent/subsidiary relationship, or brother/sister entities or affiliates.
2. Relationships of Owners and Potential Owners
Regardless of the form or structure of the business, the relationship between equity owners should be clearly spelled out in appropriate documentation, such as a shareholders’ agreement in a corporation; an operating agreement in an LLC, or a partnership agreement in a general or limited partnership. Establishing the rights of owners, including, for example, how to resolve disputes based on deadlock, are better framed by the business parties rather than leaving to chance the remedies available to aggrieved parties in state laws governing the form or structure of a business. Buy-out provisions are often quite useful in addressing ownership disputes. Buy-in options can also be part of such documents, as can other creative mechanisms to address common ownership issues.
3. Governance Documents
Likewise, irrespective of ownership documents, it is essential that any business, no matter how structured, have in place solidly written provisions as to the governance of the business – who is in charge, who controls overall policy, who implements various management decisions, and how change can be affected as amongst governing persons.
Formation documents such as bylaws can provide these critical management details. For example, a shareholders’ agreement or an LLC operating agreement can establish and place restrictions on changing directors, managers, boards of either, and how and what type of decisions are established. Related agreements can augment and support solid business governance, including employment, contractor, or other agreements, that address issues such as confidentiality, intellectual property, restrictions on activities (during and after a relationship with a business), and future events such as conversion, merger, consolidation, or asset sales.
4. Family-Based Businesses
No matter how structured, many businesses involve familial relationships. The operation of family-based businesses can be challenging, including the roles and expectations set out by existing among family members. Ownership and governance documents may play an even greater role in a family-based business, as does estate planning, trusts, and roles that might exist or be established for family members whether by blood or marriage. All too often, family businesses find themselves in the spotlight – and in court – and in almost every case, properly crafted documents can severely reduce friction and disputes or mitigate claimed damages.
5. Disputes and Dispute Resolution Mechanisms
While a topic unto itself, or maybe several topics, all businesses are subject to the stress that develops when partners, or others, such as governing boards, fail to see eye-to-eye. Differences of opinions can of course be hashed out, particularly if constructive forums are developed to do so, but divergent views often lead to ownership and governance disputes, which can be inextricably intertwined with breakdowns in the family or other relationships. Divergence in vision, strategy, inherent or management/operational change, or outright hostility can lead to disputes that cannot be efficiently and effectively resolved without a mechanism to do so.
Owners, partners, and other business members often turn to litigation to resolve such conflicts. In crafting ownership or governance documents, or even those for critical or key employees, they should address the possibility of such conflicts arising in the future. Layers of procedures can be built into what is ultimately an overarching dispute resolution process, such as mandatory discussion with the ultimate controlling authority or a senior respected member of the business, meetings with mandated third-party facilitators, mediation with or without evidence and binding or not, and forum selection for disputes. Many family businesses smartly elect, for example, to have disputes resolved through arbitration to avoid garnering attention and to maintain confidentiality as to the dispute resolution process.
6. It Is Never Too Late and Back-Up/Succession Planning
Owners of existing businesses should not make the mistake of thinking that it is too late to address disparate issues or restructure governance, ownership, or other elements necessary to enhance the operation of their business – regardless of size. Agreements, such as those discussed here, can always be adopted, and disputes or restructuring can be brought to conclusion by solid legal craftsmanship. In this regard, the key to maintaining a business and avoiding conflict is by ensuring that proper back-up exists as to critical positions, including succession planning, for times when the “patriarchal” business operations torch is passed from one to another.
If you are seeking to address these issues or would like an audit of your company’s internal operations to ensure the best structural environment exists for the short- and long-term successful operation of your business, please contact me at fmendelsohn@burkelaw.com or 312-840-7004.
