By Adam H. Koblenz, Esq. and Joseph D. Brees, Esq.

Key Insights:

  • Small businesses are the “backbone of America’s economy” and are usually family-owned and operated.
  • Small business co-owners may find themselves having irreconcilable disputes, making parting ways a necessary reality.
  • Parting ways can be difficult, time-consuming, costly, and could harm the business’ growth and profitability.
  • The core issue when parting ways is determining the business’ value, and when conflicting claims are in play for alleged wrongful conduct, small business co-owners often turn to litigation.
  • Formulating and implementing a litigation strategy is critical, especially if a dissolution proceeding under the New York Business Corporation Law or a bankruptcy proceeding is commenced.
  • Anticipating the failure or disruption of the business relationship at the outset can benefit the parties, should that circumstance arise.

Known as the “backbone of America’s economy,” small businesses line the roads of America’s cities, towns, and villages. These businesses, colloquially known as “mom-and-pop shops,” are usually just that: family-owned and operated businesses. In many circumstances, these businesses are formed as closely held entities whereby the owners (i.e., shareholders, members, partners, etc.) are relatives or individuals who share a certain level of trust/friendship. Yet, the term “small business” is misleading as many of these businesses have substantial assets, income, and value.

As with any business (or family), disagreements happen. Co-owners may disagree on the company’s growth, management, or reinvestment strategies. Relationships may teeter due to workload imbalances or unilateral action taken without consulting the other owner(s). In more severe situations, improprieties are discovered (i.e., misappropriation, self-dealing, etc.), or a “freeze-out” is underway (i.e., deprivation of employment and salary by a majority of the owner(s) for personal rather than legitimate business reasons).

There may come a point where these disputes appear to be irreconcilable, leaving the affected co-owners with only one option: to part ways, usually with one co-owner buying out the interests of the other owner. When this occurs, the core issue becomes determining the business’ value. Finding this answer can be a difficult and costly endeavor, particularly when the rules of engagement (usually memorialized in formation documents) are unclear or non-existent, resulting in gridlock. It is at this juncture when co-owners often turn to litigation, especially when conflicting claims are in play for alleged wrongful conduct. The Firm’s litigation team has substantial experience in guiding business owner(s) through this difficult and emotional process from intake to resolution.

By way of illustration, the Firm represented the majority shareholder of a commercial electrical company. The company was formed by two individuals who knew each other for decades and considered one another as family. Unfortunately, disagreements regarding the business escalated, resulting in an alleged “freeze-out.” This, in turn, led the minority owner to commence a dissolution proceeding pursuant to set procedures under New York’s Business Corporation Law.

With the guidance of Adam H. Koblenz and Joseph D. Brees, a litigation strategy was formulated to achieve the client’s objective: to acquire the minority shareholder’s interest in a cost-effective manner. This involved formal negotiations through alternative dispute resolution, and the client successfully acquired the minority shareholder’s interest. In so doing, the client avoided further protracted, uncertain, and costly litigation.

Considerations and Strategies
Parting ways can be difficult and, in certain circumstances, unavoidable. Years of commercial litigation and counselling enable the Firm’s litigation team to guide and counsel small business owners appropriately as they navigate through this difficult process. Anticipating the possibility and consequences of failure, by providing either the procedural mechanism or terms of engagement, or both, contractually at the time of business formation can benefit all parties if things go awry. Just as a pre-nuptial agreement can ease or even discourage divorce, so can negotiated dissolution provisions in the formation documents – especially with the experience of litigating such matters in their absence.