A while ago I was engaged to assist two partners who had worked since their college years to build up a very successful business.  Now, more than 25 years later, they could barely be in the same room with each other, and wanted help in finding a way out.

Just the other day, I opened the first page of Stephen H. Knee’s book, Business Divorce, and found this problem described:

Two individuals form a business.  One has expertise in the normal back-office functions, the other is a great salesperson.  Over the years, one of the individuals begins to feel that she is contributing much more to the business than the other individual and that is unfair, because both are drawing the same salary and are 50-50 owners.  The resentment results in the individuals barely communicating with each other and adversely affects the performance of the business.  The decision-making process becomes deadlocked — the resentment builds until there is an event that pushes the first individual over the cliff.  The battle has begun.

Stephen Knee, where were ya when I needed ya??

 

This is one of those thin books — barely 100 pages — that you wonder how you did without all these years.  The author has simple and straightforward advice for drafters of partnership, LLC and other similar agreements, that emphasize the importance of buy-sell provisions, triggering events, dispute resolution provisions, disputed valuations, and tax considerations.  Psychologist Jane M. Sullivan writes about the inescapable dynamics of closely-held businesses, which often dominate the process of business divorce far more than economic or legal considerations.  Knee reminds us, too, that an ADR specialist is not the only essential consultant in a business divorce — legal, accounting, business and even psychological insight is often appropriate in order to fashion a break-up agreement that is mutually satisfactory and sustainable.

In characteristically straightforward writing, Knee addresses the legal ethics of lawyers’ consulting in business breakups, citing the caution in the ABA’s Model Rule of Professional Conduct 1.7(a), that the consulting lawyer “determine at the outset who the professional is representing and advise the other parties to retain their own professionals.”  And he gives an illustrative laundry list of legal and other issues that are implicated in the break-up process: handling existing obligations of the entity, settling the owners’ non-monetary benefits like health and life insurance; addressing contingent liabilities such as pending or threatened litigation, managing dissenters’ rights in corporations, and a host of other issues such as union contracts, regulatory and environmental concerns, government filings, and (by contributor Kenneth G. Hydock) tax treatment of the dissolution transactions.

In such a complex context, the use of ADR processes to resolve issues that are not agreed upon, while specifically and intelligently addressed, seems almost an afterthought, however necessary.

This is a great guidebook, one that can be (and clearly must be) reviewed before any of us venture into the mine-laden fields of assisting individuals in managing business break-ups.

 

F. Peter Phillips is an arbitrator and mediator practicing through Business Conflict Management in Montclair, New Jersey. He is also the Director of the Alternative Dispute Resolution Skills Program at New York Law School where, as Adjunct Professor, he teaches Alternative Dispute Resolution, Negotiation, and International Commercial Dispute Resolution.