Are You Ready for A Business Breakup?
Breaking up is hard to do. That’s a famous saying, usually applicable to personal relationships. But it can be even more accurate when it comes to the breakup of a business. A business breakup can lead to lawsuits, litigation, and potentially even the dissolution of the business.
One of the best ways to avoid lawsuits when there is a problem with the business breaking up, is to plan in advance by having proper clauses in Bylaws and Articles. Your corporate documents can answer questions such as what happens if the business simply can’t make enough money to survive? Obviously, creditors will have to be paid first, but beyond that, where do the assets of the company go?
What happens if a vital member of the company leaves, either voluntarily (such as moving away) or involuntarily (death, incapacitation, etc)? Does the company continue on, and what happens to the departing member’s shares?
What happens when someone is “fired” from a company, and that person is also a shareholder? In smaller companies, shareholders may be active officers and employees of the company.
Putting aside the legality of firing the shareholder from his or her position (which itself may lead to lawsuits), firing a shareholder does not cut off any rights that person has as a shareholder, such as the right to vote, or the right to draw a dividend or share in the company profits.
If you are firing a shareholder for not carrying his or her workload, or for doing something against the best interest of the company, you probably don’t want that shareholder to be a part of the business. Does the business have to dissolve to cut off the shareholder’s rights? It is possible, unless there is something in writing explaining what happens in this kind of situation.
Assets and Competition
Even if you have decided on who will get what company property and assets should the company dissolve, have you thought of what is and is not a company asset? A shareholder, partner, or member of a company that brings customer lists, inventory, or other expertise into the business, may contend that these items are not company property to be divided on the company’s dissolution, but rather, should go back to that individual person.
If the company does dissolve, can any shareholder, officer or member go out and start a similar business? They may be able to if there is no noncompete agreement or similar agreement not to use or disseminate trade secrets.
In the absence of anything in writing, courts will usually have to determine these questions. And if a departing shareholder, member or owner leaves the company with property, assets, or trade secrets, he or she can destroy a business. Planning ahead can avoid these problems.