TUCKER H. BYRD
CO-FOUNDER BYRD CAMPBELL, P.A.
D-I-V-O-R-C-E is an ugly word when it comes to lawsuits, and few hold the drama of a break up of a closely-held company, aptly-named a “corporate divorce.” For that matter, few domestic divorces match the emotional firepower of a meltdown between founding partners, a corporate coup, or the “changing of the guard” orchestrated in a family-owned business. When egos mix with an intimate knowledge of each owner’s faults and skeletons collected over a lifetime of business together, the feuding parties can easily “push” each other’s “buttons” enough to achieve mutually-assured destruction.
Faced with changed door locks, access denied to the company’s computers, and being cut off from the company’s finances, the ousted party may find it difficult to get their bearings to respond to a hostile takeover. So when you find yourself “locked out,” what can you do? The answer is plenty. Here are eight (8) things to do, and four (4) not to do:
- Review Shareholder/Operating/Partnership Agreements: For all types of business entities, i.e., corporations, limited liability corporations, and general and limited partnerships, the agreements between the owners may determine who has the power of control. Any analysis in a corporate divorce should begin with an extensive review of the underlying company agreements. What the parties fail to address in the agreements may be addressed by the applicable state statutes pertaining to your type of business entity.
- Seek Injunctive Relief: In cases of a hostile takeover, you should consider seeking immediate injunctive relief to prevent the ouster, including reinstating the ousted party, or curtailing the ability of the hostile party to govern. Bear in mind, however, that the purpose of the injunction is to restore the status quo ante before the takeover, so emphasis should be placed on arguing a return to the pre-hostility state of the company, while the claims are resolved in the lawsuit.
- Sue for Breach of Contract: In addition to suing for injunctive relief, you should consider suing for money damages. This strategy may become problematic depending upon who has the legal standing to sue. For injuries to the company itself, as opposed to the individual owners, the company may be the party to sue. The paradox, of course, is that the company which has been taken over, while under the power of the hostile party, will not likely sue that same hostile party for its misconduct. In such a case, the ousted party may have to file a “derivative action,” a specialized type of lawsuit in the name of the company, brought on behalf of the company, against the hostile party.
- Limit Bank Account Access: Hostile takeovers often include a battle over the company’s bank accounts. Who can access the bank accounts is determined by lawful company actions (e.g., board resolutions, etc.), and you may be able to convince the bank to limit the hostile party’s access to the bank accounts. Cutting off financial resources is a quick way to quell any hostile takeover.
- Enforce Lifetime Employment Agreements: Even in states which recognize “at will” employment—and despite the lack of a written long term contract—a party ousted from the company and excluded from working in the business may have the right to argue entitlement to a permanent or “lifetime contract” with the company. For example, when both parties make contributions to start up the company (i.e., through paid-in capital, or “sweat equity”) and exchange commitments that both intend to “work in the business,” you may be entitled to a claim for permanent employment (i.e., “lifetime employment”).
- Impose Forced Buyouts: Sometimes a hostile takeover, particularly when combined with a forced merger or sell-off of company assets, triggers rights and protections for the ousted party. So-called “appraisal rights” to be bought out at fair market value may arise as a result of actions taken by the hostile party. Also, the agreements between the parties may include provisions to be bought out in the event of an ouster.
- Pursue Receivership or Custodianship: The “nuclear options” of having a receiver or custodian appointed may be available if the company is being wasted, or a management deadlock exists (e.g., in cases of 50/50 ownership) between feuding company factions. Having a third-party receiver appointed usually results in a sale or liquidation of the company, but if you’ve been ousted, with no hope of retaking control, seeking a receiver may be your only choice to check the hostile party’s actions. Custodianships impose less restrictions, but can be equally effective. Plus, custodians tend to work more closely with the parties than receivers who typically assume a posture adversarial to both feuding parties.
- Engage in Proxy Fights: If multiple owners exist who have not taken sides in the dispute, you may regain control through ownership voting initiated through proxy contests. Through the voting process, you may be able to win over the vote of the neutral owners by disclosing the nature of the dispute and convincing other owners to vote along with your side to re-establish control.
The list of what TO DO has be to be balanced with a few suggestions about what NOT TO DO:
- Never threaten criminal prosecution to gain an advantage in a corporate dispute. It might be considered an extortionist threat, even if the hostile party has committed a crime.
- Be careful about threatening to report tax irregularities. This may bring the wrath of the IRS down on the company which could threaten both the hostile and ousted parties
- Don’t assume the court will readily see the egregiousness of the hostile party’s misconduct. Courts often view a corporate divorce with the same skepticism as a domestic divorce, and tend to assume that two sides to the story of any dispute exist. You may be disappointed to find the court doesn’t see your point of view right away.
- Be careful not to respond to the hostile party’s overreaching with overreaching of your own. It may make you feel good, but does not win points with the court. The adage, “Two wrongs don’t make a right,” applies.
**AT BYRD CAMPBELL, we have handled countless corporate divorces. Some end in winner-take-all trials. Some result in the liquidation of the company, and as remarkable as it may sound, many corporate divorces resolve with the feuding parties remaining in mutual control. Consequently, any deft handling of corporate divorces should include diplomatic, as well as traditional legal enforcement measures.
Remember, being “locked out” does not mean you’re down and out!