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Real Possibilities For Business Divorce

In: Business

 

The method by which a disgruntled business partner might pursue a business divorce is heavily influenced by the type of corporation. Although classic general partnerships can be involved, most commercial divorces include corporations, limited liability companies (“LLCs”), or limited partnerships (“LPs”). Obtaining a true “dream tech news” for a corporation is difficult unless the corporation is owned equally by two investors, a situation known as “50-50 ownership.” In that case, there is a provision that applies to 50-50 ownership situations and allows one stockholder to ask the court for a dissolution order.

If the corporation does not have 50-50 ownership, most companies don’t not have a statute that allows a stakeholder to seek the entity’s dissolution. However, a statute that allows a stockholder to seek the appointment of a custodian if the stockholders are deadlocked and unable to elect new directors, or if the board is deadlocked and unable to end the stalemate. Despite the fact that the Act does not clearly provide that the custodian designated under the statute may sell the firm, courts have recently appointed custodians under the statute to sell the company in order to break the deadlock between the parties.

If it is no longer practically possible to continue on the business in accordance with the operating or partnership agreement, the appropriate statutes allow the Court of Chancery to dissolve the entity. Deadlock among the entity’s operators is the most prevalent occurrence that meets this criterion. Even if there is a deadlock, the court will look to the parties’ agreement to see if they agreed in advance on how a disgruntled employee or partner could leave the company.

The court is more likely to dissolve the entity if there is no exit mechanism in the agreement or if the exit provision would result in an inequitable result. Despite the fact that the LLC agreement included a departure clause, the disgruntled member would not have been relieved of his personal guarantee on the company’s property mortgage if he used it. The court determined that the result was unfair to the departing member because he had no control over the running of the business and hence had no way of avoiding liabilities under the mortgage.

These statutes also allow for the dissolution of LLCs and LPs if the business goal is not met, resulting in inequity further advancing to business divorce. For example, despite the fact that there was no deadlock among the members, the court agreed to dissolve an LLC formed to market, distribute, and sell natural beef because the member who was supposed to supply the beef to the company terminated the supply contract and announced its intention to compete with the company. As a result, the LLC ran out of beef and was unable to find another since a condition in the LLC agreement compelled the management to operate in the members’ best interests. The court reasoned that the LLC’s unfavorable result necessitated the use of its discretion to dissolve it.

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