Business Divorces

1. Business is like a marriage
   • In the beginning everything is rosy and the business will be successful and the co-ownership will last forever.
   • More of your waking hours are spent in the business than anywhere else.
   • Problems occur:
     • Between co-owners
     • With the operation of the business
2.  What’s the issue
   • Termination of employment does not terminate ownership
   • The ownership interest is property of the owner- one owner cannot simply take from another.
   • It’s going to cost money
     • To buy the interests of the departing owner
     • To negotiate
     • To Exercise legal rights
3. The hard way- Statutory provisions
   •  Corporations
     • The remedy is actually court ordered dissolution of the company
     • One or more of the following must be present[1]:
       • Deadlock of Directors and shareholders injurious to the conduct of the business (business paralysis)
       • Directors or those in control acting in a way which is:
         • Illegal
         • Oppressive; OR
         • Fraudulent
     • Assets being wasted or Misapplied[2]
   • Dissolution presents its own set of problems:
     • In a dissolution property remaining after payments to creditors (including taxes) are to be distributed among shareholders pro-rata[3]
     • Many assets may not be divisible:
       • Name, phone number website
       • Assets may be had to value
       • Intangibles like relationships
   • Limited Liability Companies
     • The remedy may be dissolution of the company BUT for an LLC a judge may order a remedy OTHER THAN dissolution[4]
     • One or more of the following must be present[5]:
       • It is not reasonably practicable to carry on the business
       • The Managers/members have acted in a way which is:
         • Illegal
         • Oppressive; OR
         • Fraudulent
     • Dissolution of an LLC presents problems similar to those of a corporation[6]
4. Easy(er) Way- Buy/Sell Agreement
   • Like a Pre-nuptial Agreement
   • Avoids dissolution and problems with distribution of the assets of the business to the owners
   • Key Benefits
     • Flexible
       • Terms can be changeable at any time and from time to time by agreement
       • Often purchase price is based on appraisal or a stipulated formula
       • Payment amounts and terms can be tailored to meet the triggering event (Example different terms if co-owner simply quits than if they are fired)
       • Can be used to eliminate deadlock: one simply buys out the other.
     • Determined at a time when parties are not angry/under stress
     • Objectively “reasonable” since they are established by agreement-YOU NEVER KNOW IF YOU WILL BE A BUYER OR A SELLER so you better do the right thing.
   •  Drawbacks
     • YOU ACTUALLY HAVE TO DO IT!!
     • They can still be difficult and expensive to enforce
     • If ownership is not 50/50 they could work to the disadvantage of the minority owner
     • Recommended Formula for provisions on buyouts not caused by death, disability or termination of employment- Russian Roulette (one offers a price for the shares of the other and the offeree can buy the offeror’s shares at that price).

Contact the Kreamer Law Firm, P.C. for assistance with a “business divorce”, a buy/sell agreement, or any other legal matter regarding your business at 515-727-0900 or info@Kreamerlaw.com

[1] Iowa Code Section 490.1430(1)

[2] Also failing to elect successor directors

[3] Iowa Code 490.1405 (generally) and 490.1405(d) (particularly)

[4] Iowa Code 489.701(2)

[5] Iowa Code 489.701(1). NOTE: this section also sates additional grounds for judicial intervention.

[6] Iowa Code 489.702(2)