Business divorce is a common dilemma that business partners can face. The factual premise for most business divorces involves two or more people, often relatives, friends, or colleagues, who decide to form a business together. After the business becomes a success, the owners have a dispute causing a deadlock between the decision makers of the company. The operations can no longer continue, and the owners are forced to hire attorneys to assist in winding up the business or negotiating a solution to break the deadlock.
This seemingly simple fact pattern can become an expensive and complex process for two main reasons. First, the formation documents for the business (operating agreement, partnership agreement, bylaws, shareholder agreement, etc.) never accounted for the possibility of a business divorce and failed to set out procedures for breaking a deadlock, a buy-out, or another exit mechanism. Second, Texas law does not provide a clear remedy for business disputes between owners, because a court-ordered business divorce does not exist in Texas.
Without deadlock or buy-out procedures set out by an agreement and the absence of clear remedies under the law, attorneys must assert claims against other owners to create pressure to negotiate a buyout agreement. Alternatively, attorneys can obtain monetary damages and injunctive relief to reduce the other owner’s membership interest for failure to contribute time, money or property to the entity or for malfeasance in operating it.
Hayes Hunter PC has assisted several clients facing this exact dilemma. Most recently, Hayes Hunter PC founder, Charles Hunter, and associate attorney, Jessica Chan, successfully obtained a judgment against a managing member of a Texas limited liability company. The Court found that the Defendant was liable for breach of contract, breach of fiduciary duty, and conversion of company funds and awarded our client $97,886.81 for actual damages and $100,000.00 in attorney’s fees and costs. The Court further granted injunctive and declaratory relief, which reduced the Defendant’s ownership interest in the company.
Other remedies to break a deadlock in management include a petition for reorganization in bankruptcy or the appointment of a receiver. However, these sometimes-extreme remedies can be avoided with a carefully drafted agreement providing ahead of time for a private resolution of any business deadlock.
Hayes Hunter has experience in drafting organizational documents and litigating business disputes. Please contact us if need assistance in your business.
