Business Divorces

  1. UntitledBusiness is like a marriage
    • In the beginning everything is rosy and the business will be successful and the co-ownership will last forever.
    • More of your waking hours are spent in the business than anywhere else.
    • Problems occur:
      • Between co-owners
      • With the operation of the business
  2.  What’s the issue
    • Termination of employment does not terminate ownership
    • The ownership interest is property of the owner- one owner cannot simply take from another.
    • It’s going to cost money
      • To buy the interests of the departing owner
      • To negotiate
      • To Exercise legal rights
  3. The hard way- Statutory provisions
    •  Corporations
      • The remedy is actually court ordered dissolution of the company
      • One or more of the following must be present[1]:
        • Deadlock of Directors and shareholders injurious to the conduct of the business (business paralysis)
        • Directors or those in control acting in a way which is:
          • Illegal
          • Oppressive; OR
          • Fraudulent
      • Assets being wasted or Misapplied[2]
    • Dissolution presents its own set of problems:
      • In a dissolution property remaining after payments to creditors (including taxes) are to be distributed among shareholders pro-rata[3]
      • Many assets may not be divisible:
        • Name, phone number website
        • Assets may be had to value
        • Intangibles like relationships
    • Limited Liability Companies
      • The remedy may be dissolution of the company BUT for an LLC a judge may order a remedy OTHER THAN dissolution[4]
      • One or more of the following must be present[5]:
        • It is not reasonably practicable to carry on the business
        • The Managers/members have acted in a way which is:
          • Illegal
          • Oppressive; OR
          • Fraudulent
      • Dissolution of an LLC presents problems similar to those of a corporation[6]
  4. Easy(er) Way- Buy/Sell Agreement
    • Like a Pre-nuptial Agreement
    • Avoids dissolution and problems with distribution of the assets of the business to the owners
    • Key Benefits
      • Flexible
        • Terms can be changeable at any time and from time to time by agreement
        • Often purchase price is based on appraisal or a stipulated formula
        • Payment amounts and terms can be tailored to meet the triggering event (Example different terms if co-owner simply quits than if they are fired)
        • Can be used to eliminate deadlock: one simply buys out the other.
      • Determined at a time when parties are not angry/under stress
      • Objectively “reasonable” since they are established by agreement-YOU NEVER KNOW IF YOU WILL BE A BUYER OR A SELLER so you better do the right thing.
    •  Drawbacks
      • YOU ACTUALLY HAVE TO DO IT!!
      • They can still be difficult and expensive to enforce
      • If ownership is not 50/50 they could work to the disadvantage of the minority owner
      • Recommended Formula for provisions on buyouts not caused by death, disability or termination of employment- Russian Roulette (one offers a price for the shares of the other and the offeree can buy the offeror’s shares at that price).

Contact the Kreamer Law Firm, P.C. for assistance with a “business divorce”, a buy/sell agreement, or any other legal matter regarding your business at 515-727-0900 or info@Kreamerlaw.com

[1] Iowa Code Section 490.1430(1)

[2] Also failing to elect successor directors

[3] Iowa Code 490.1405 (generally) and 490.1405(d) (particularly)

[4] Iowa Code 489.701(2)

[5] Iowa Code 489.701(1). NOTE: this section also sates additional grounds for judicial intervention.

[6] Iowa Code 489.702(2)

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