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Preventing and Mitigating the Nasty Corporate Divorce

Closely-held corporations are like marriages. When personalities mesh and goals are aligned, the family can prosper. When they don’t, you may end up in a nasty divorce.  When beginning a new venture, however, too many clients overlook the possibility of such a divorce.  Therefore, they forgo spending the time necessary to mitigate the possibility of future disputes.  As I have witnessed, the passage of time and the demands of a new business tend to strain business relationships.  In addition, disputes often arise between the next generation of owners in family-owned businesses.  But preparation on the front end and ongoing good governance can help ease the pain of these later disputes.  Below are some suggested best practices.

  1. Prepare the appropriate written agreement. I often see businesses that began on a handshake or were amended on the basis of verbal agreements end up in litigation.  This lack of documentation makes litigation more cumbersome, uncertain and expensive.  It is, therefore, worth investing in an attorney who can prepare the appropriate shareholders’ agreement. This agreement should address the possibility of litigation and each owner’s rights, duties, and obligations.  This initial investment is worth every penny.
  1. Review your agreements. Having a written agreement is a good first step.  However, you need to READ and UNDERSTAND that agreement.  If you don’t understand what the agreement means for you, you have accomplished nothing by having it prepared.
  1. Keep good records. Good minutes help keep everyone informed about important company decisions.  Minutes should be recorded from the very inception of the venture.  Records that should be kept in good order include monthly financial statements, correspondence files, invoices, purchase orders, etc.
  1. Meetings. Regular meetings help keep all partners or shareholders informed of the company’s well-being and significant developments.  You don’t want to be accused of unilateral decision-making.
  1. Counsel. Retaining corporate counsel can help alleviate the burden of knowing what to do and when.  Counsel can also inform you about your jurisdiction’s particular corporate laws.  
  1. Plan for the future. If you intend to pass your business on to your children, you need to form an appropriate succession plan.  Your children need to know their respective rights and obligations.

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