A civilized split
The anatomy of a business divorce
BY CARA K. LOWE
Economic downturns often lead the owners of privately held companies to go their separate ways.
In a perfect setting, the parties would execute a
fair and civilized splitting of assets and resources
— either by dividing the company equally or by
having one party buy out the other — and then
ride off into the sunset with their friendship, egos
and fortunes intact.
buy-sell agreement clearly identi-fies, among other things, all of the
potential triggering events and
sets out the procedure for paying,
and, more important, pricing the
bought-out interest.
When a buy-sell agreement is
lacking or outdated, the parties
have to work out a settlement,
which can be difficult if they do not
get along. The only obvious options
are to negotiate, or, if all else fails,
dissolve the company voluntarily or
involuntarily under state corporate
or partnership law.
Ho w do you value the buyout?
Without an effective buy-sell agreement, the parties have to negotiate
a price that they jointly consider realistic and relatively accurate — or,
at a minimum, relatively fair.
Usually the business owners are
best suited to value the company,
with advice from the company’s
accountants, though they can also seek third-party appraisers or
other industry experts. Valuation is
complex and involves weighing all
factors that impact the company’s
bottom line, including current and
future revenues and liabilities.
Additionally, the parties need to
assess the tax consequences of any
proposed resolution to the company, the departing owner and the
remaining owner.
If you’re leaving, what can you
take without consent? The short
answer is not much. All property
used in the business belongs to the
company, except items purchased
by an owner with personal funds.
The company owns all tangible
property that a partner uses for
business or pleasure if corporate
funds were used, such as PDAs and
computers (and jewelry and other
expensive gifts, which were discovered after the fact in one dispute
I negotiated). Business opportunities arising before a partner’s
departure generally belong to the
company, and failure to report those
opportunities can lead to fiduciary
breach claims.
If you are the remaining own-
er, how do you preserve the com-
pany? The remaining owners need
to swiftly develop a plan to preserve
the company’s value and retain key
employees, assets, clients and con-
tracts. They also need a back-up
plan to address potential scenarios
where one or more of these “key
value factors” go with the depart-
ing partners.
In an
ideal
world, the
owners
would
reach a
quick and
amicable
resolution.
real world, however, one side often
has packed their bags and headed
out the door. This forces the remaining partners to scramble to retain
key talent and develop a thoughtful
communication plan.
Fiduciary duties under California
law prohibit officers, directors, partners and majority shareholders from
soliciting other employees, owners
and clients, prior to such fiduciaries’
resignation and termination. Often,
express non-solicitation covenants
may apply.
When can the parties start
dating? Most states enforce non-competition covenants if they are
reasonable. In contrast, California finds most noncompetes unenforceable unless the terms fit
squarely within one of the statutory
exceptions.
Additionally, any overly broad
or overreaching covenants that
do not comply with California law
can be struck. Also, individuals
who are “owners” in name only
and are more like employees argu-
ably could challenge the “partner/
shareholder/owner” classification
as a “sham” and void the restrictive
covenants.
Cara Lowe is a corporate partner
and managing partner at San
Francisco-based law firm Stein &
Lubin LLP. Her general business
practice focuses on complex commercial transactions. Reach her at at
clowe@steinlubin.com.
