Ownership Disputes – Intro
In this article, we focus on another reason to engage in best practices when it comes to corporate governance—Avoiding Ownership Disputes.
Many people contact business litigation attorneys when it is too late to avoid a dispute. When that happens, the costs and stress of litigation can mount. Here are some relatively simple and cost-effective measures to help you avoid an ownership dispute down the road.
Planning to Avoid Ownership Disputes
As an initial matter, if you have either no agreement or one that is silent about how, where and when owner disputes are resolved, you and your co-owners will be left to resort to the remedies and relief offered by the various California statutes and case law which govern corporations, partnerships and LLCs. Unfortunately, in most cases, the relief and remedies provided by those statutes are relatively weak, “one size fits all” provisions designed to provide a standardized set of rules, in contrast to the customized remedies and processes you and the other owners could devise before any trouble starts. Once you start to disagree about important business issues, it really is too late because it is rare that owners in conflict will come to an agreement about how disagreements should be addressed once they have arisen.
This leads a sometimes hard earned lesson: Plan Ahead for Disputes. Most relationships between humans, whether married couples or business partners, will involve disagreements now and then. It is a reality that is easy, but costly, to overlook. If business owners accept this reality and commit to determining how disputes will be resolved from the outset, they will be miles ahead of the pack. For instance, the owners could discuss the possibility of including mediation or arbitration provisions in their governing documents, whether that includes an Operating Agreement, Partnership Agreement, Shareholder Agreement, a Buy Sell Contract, or a combination of governing documents. Mediation and arbitration are typically far more cost-effective options than litigation, but they are not bound to engage in mediation or arbitration unless they agree to such processes ahead of time.
Other important issues to discuss in the planning phase include what will happen in the event one of the key owners becomes sick and is unable to perform his or her obligations to the company, or decides to sell their interest in the company. If your business’ controlling documents don’t provide a roadmap to address these and other possibilities, then you could end up with a new owner in the company that you can’t work with, don’t want to work with, or even worse, one who is there to raid the company and leave it in shambles. Another real possibility for many small businesses is the potential for the spouse of a deceased owner to step in and take control if a key owner passes away. Many companies have been led to bankruptcy because of completely foreseeable events taking place, like these, that the owners did not plan for ahead of time.
Hiring an Experienced Business Law Attorney to Avoid Ownership Disputes
Once you have started thinking about and discussing your options for addressing these corporate governance issues, it is wise to hire an experienced business law attorney to help you reduce your agreements to writing, to ensure they are enforceable and meet your company’s particular needs. Whether your business operates as a partnership, LLC, or corporation, a key to lasting continuity of your company’s operations, and its continuing success, often lies in well-drafted legal documents, from Partnership Agreements, to LLC Operating Agreements, Shareholders Agreements, Buy/Sell Agreements, or other documents as your company’s needs dictate.
Then, when disputes arise, as they inevitably do, the owners can look to these documents for guidance; they should inform the owners of the process by which they are bound to resolve their disputes, liked mediation and arbitration. Business law attorneys usually recommend mediation provisions, at a minimum, as well as language which permits the prevailing party to recover their attorney’s fees and costs in the event of a dispute. Such clauses place pressure on parties to come to an agreement without resorting to litigation and help prevent frivolous lawsuits. Without them, potentially destructive litigation is often the result.
Another consideration your business law attorney may want to address includes how to value shares or an owner’s membership or partnership interest in the company. The governing documents can be very detailed at assisting owners in determining how their interests will be valued when it comes time to sell or transfer them, without having to resort to a lawsuit. Including language providing non-selling owners with a right of first refusal to purchase a selling owner’s interest is also highly recommended in many cases in order to prevent an unwanted third party from becoming an owner of the business.
In summary, planning ahead for disputes and foreseeable life events is what business lawyers are trained to consider. Put experience and knowledge to work for you and let us help you avoid a costly ownership dispute.