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Corporate divorce: prepare for the worst, hope for the best

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Posted by Daniel Jennings on 05 September 2019

Daniel Jennings - Defamation Disputes Lawyer
Daniel Jennings Partner

“There is a bear in the woods, some say the bear is harmless others say it is dangerous, but if there is a bear, doesn’t it make sense to be as strong as the bear?” 

When people think about divorce they think about a difficult, acrimonious process and a painful division of assets, all too often with the attitude that if only the other person would be reasonable everything would be straightforward.

Treat exiting a business as you would a divorce

When people think about exiting a business, they assume that all will be straightforward; negotiations amicable; their contribution and efforts will be recognised, and there will be a ready willingness and ability to pay what that person thinks they are owed.

By the same token, a part-owner or shareholder in a business all too often believes that everything has been agreed; everything is amicable, and the business will run along smoothly with them in place for years to come.

The truth, regrettably, is all too often very different. Leaving a business can be as acrimonious as a divorce. Shareholders, whilst running a business, can fall out and fail to reach any form of working compromise to the point where they find themselves involved in a dispute.

In our experience, if those individuals wanting to quit a business were to treat the process like a divorce (hence the term corporate divorce), their exit would almost always be quicker, easier and smoother with a better return, enabling them to move on to the next stage of their lives.

Preparation is the key to success

Therefore, it is always advisable to go into any negotiation fully prepared. This means understanding what can go wrong as well as what can go right. For this reason, it is sensible to consult a disputes’ lawyer at the outset in order to know what your rights are and your prospects of success if your efforts to exit the business become bogged down in arguments. Armed with this information, you will be much better placed to negotiate a smooth exit on the basis that, having identified the bumps in the road you will be better equipped to avoid them.  Going in blind to negotiate can work, but it’s a risky strategy.

This approach seems obvious when you step back and think about it. Despite everyone’s good intentions, a divorce can quickly become hostile and the previously loving and affectionate relationship with your other half deteriorates into a bitter fight for every last penny.

Although a corporate divorce is not distracted by the push and pull of marital emotion, many business partnerships are forged on the basis of good friendships which can turn equally bitter in the face of a potential break-up. There is no reason to assume that just because you and your business partner got on like a house on fire that they will be willing to be more fair or generous with you when your respective objectives diverge.

Treat your exit as any other negotiation

Consider approaching the end of a business relationship in the same way you would normally conduct business with a third-party supplier. Would you go into negotiations by laying all your cards on the table, say “this is what I have got, this is what I want, and this is what I need, so please give it to me”?  Why would you approach your exit from a business any differently to your general approach to conducting business negotiations? This is the point at which you must remain objective: your task is to persuade your business partner of the merits of your position, in the same way that you might persuade a potential customer of the merits of employing your business’ services. If negotiations break down, that is when you deploy the alternative strategies discussed with your disputes’ expert.

Understand your rights before starting negotiations

Generally, when someone is contemplating divorce, the first thing they do is to establish their rights: will they be able to have what they want after the divorce; what their obligations will be; and what can they expect to get out of it.

The same principles need to be applied to a business ‘divorce’ where an individual is trying to exit or is being manoeuvred out of the business by the other shareholders. Both parties need to understand their rights and how they can, or cannot, exit the business; how they can stop another party forcing them out of that business; or how someone can be safely removed. 

Therefore if you find yourself in a position where you want to exit from a business or believe you are being pushed out; or you want to remove an under-performing director or shareholder, it is prudent to ensure that all the weapons in your arsenal are primed and ready for action. Although no one wants to end up in a dispute, if you prepare for it, you have a greater chance of avoiding it. Our disputes’ specialists, who deal with these matters on a regular basis, can help to steer you safely through the choppy waters of a corporate divorce regardless of whether you are leaving the business or are trying to remove someone else.  

About the author

Daniel advises clients on all aspects of commercial litigation and dispute resolution.

Daniel Jennings

Daniel advises clients on all aspects of commercial litigation and dispute resolution.

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