When people ask me what kind of law I practice, I tell them I’m a business divorce lawyer. Many people are confused by the word “divorce” paired with ”business” — they assume it has something to do with marital divorce – so more often than not I quickly explain that I handle corporate dissolution and other types of disputes among co-owners of privately owned companies.
But what does it really mean to be a business divorce lawyer? Does it require a special temperament and skill set? Is a business divorce practice any different than other kinds of business litigation? Here’s my take on the answers to these questions:
It Means Being a Hand Holder. It’s called business divorce for a reason. As in a marital divorce, a relationship is being torn asunder in the breakup of a business partnership. It’s not just about money. It’s about the inter-personal grievances, resentments, antagonisms, affections, disappointments, jealousies, and innumerable other emotions that attach to people with close relationships whose common interests have diverged to a critical point. The emotions can run even higher when it’s a family-owned business. The client’s emotional need for support and guidance, on top of the uncertainties surrounding the future of the business in which the client’s self-identity is wrapped, puts a premium on the lawyer’s 24/7 accessibility, empathy and ability to give on-the-spot advice and reassurance. These qualities in a business divorce lawyer are particularly important because, unlike many types of business litigation in which the parties are fighting over the financial consequences of fixed (albeit disputed) historical facts, business divorce litigation is highly dynamic. By that I mean, the now-adverse business partners, who often have to continue working together and make business decisions while simultaneously engaging in mutual mud-slinging in court filings, require constant input from legal counsel to assist with a daily stream of new issues at the workplace.
It Means Knowing Your Client’s Business. Every closely held business is different. Some operate on a partnership model with diffuse authority and little or no formality in regard to decision making. Written agreement among the owners may be non-existent. Others may have detailed written agreement calling for hierarchical management, and still act like a cadre of co-equals. Others may have a detailed written agreement with a hierarchical management structure that is rigorously followed. The business divorce lawyer also must discern who holds what leverage in the company’s business. For example, one owner may control relations with the company’s key customers, which may have significant implications in terms of who’s in a position to buy out whom. One owner may have personal financial resources the other lacks, or may personally own the real estate housing the company’s business. The point is, as a business divorce lawyer you need to understand how the business at hand operates, not just on paper but in practice, and you need to understand how the business operation affects your client’s ability to prosecute or defend claims of shareholder oppression, deadlock or financial impropriety, and how it influences the range of possible outcomes.
It Means Knowing Applicable Statutory and Case Law. Each form of business entity, be it partnership, corporation or limited liability company, is governed by a separate statutory scheme with rules that, in many key instances, are significantly different as is the case law that has developed around each form. The standing requirements to bring a dissolution proceeding vary among the entities, and even within the same type of entity depending on the statute invoked. The availability of a buyout remedy depends on the type of entity and the alleged statutory basis for dissolution. Under still-evolving case law the filing of a dissolution petition may inadvertently trigger a right of first refusal under a shareholders’ agreement. Particularly with corporations, there are numerous, mandatory, statutory provisions that come into play at the board level. The availability of a court-appointed receiver can differ depending on the entity type. The list goes on and on. The business divorce lawyer must have a thorough understanding of the legal framework within which closely held businesses operate and whose rules govern forced judicial dissolution, derivative actions and other varieties of owner vs. owner litigation.
It Means Understanding Accounting Basics. Almost every business divorce case involves some degree of dispute over company finances and accounting. Many small companies involved in business divorce litigation do not prepare any financial statements, much less do they have an outside CPA who prepares audited financial statements. The company’s tax returns may present a distorted picture of the company’s income, compensation to principals, and other expenses. A business divorce lawyer must have a basic understanding of financial and tax accounting, including the ability to comprehend financial statements, internal reports such as Quickbooks, and (last but not least) tax returns, in order to converse intelligently with the client and the client’s accountant about financial issues that likely will take center stage in the litigation.
It Means Understanding Valuation Basics. In many instances, by the time lawyers are brought into the picture the relationship between the business owners has deteriorated past the point of no return. If it’s a viable business, one or the other is going to have to be bought out. The single biggest impediment to amicable resolution becomes the disparate views of the company’s value as seen through the very different lenses being worn by the potential purchaser and the potential seller. The business divorce lawyer is not a business appraiser, but he or she must be able to elevate the client’s understanding of basic appraisal approaches and methodology, along with any applicable legal concepts such as the case-law-driven rules surrounding minority and marketability discounts in “fair value” buyout proceedings. The lawyer’s grasp of appraisal doctrine becomes even more critical when collaborating with a professional business appraiser who has been engaged to prepare a valuation report and to testify as an expert at a valuation hearing. The business divorce lawyer must be able to speak the language of appraisal and understand its doctrinal basis to put on a persuasive valuation case and to score points when cross-examining the opposing appraisal expert. In the 25 or so years I’ve been involved with business divorce cases, the business appraisal community has made dramatic gains in professionalism and academic rigor. Gaining a lawyer’s knowledge of this interesting and complex discipline can be rewarding in and of itself.
It Means Knowing the Purposes and Limitations of Litigation. When I give talks on business divorce topics, almost invariably I tell the audience that the vast majority of cases involving a viable business ultimately leads to a buyout settlement, and that it’s only a question of how much time, distraction and legal expense the parties are willing to bear before they realize that the legal system is not an efficient or even wise way to decide the fate of a living, breathing company. I also discuss with clients the merits of mediation before (or even after) litigation erupts. That being said, for many different reasons litigation can be an unavoidable and necessary tactic in reaching the strategic goal of separating business partners who no longer can co-exist as owners and managers. Sometimes there’s just no other way to grab the attention of the other side. The litigation will take its normal, unpredictable course. There is the occasional early-round knock-out punch in these cases but, by and large, the parties’ expectations of a quick resolution are foiled by the many delays and inconclusive procedural and discovery skirmishes attendant to almost all litigation. As the case drags on and the legal costs mount, the clients begin to reassess the costs and benefits of a buyout settlement. The business divorce lawyer must be willing to take the lead in re-evaluating and advising the client of litigation and settlement prospects at every stage of the engagement.
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