The Business Divorce: Split Up of a Closely Held Business in Texas

Owners of closely held companies have many things to manage. From problematic relationships and business owner disputes to regulatory compliance, shareholder oppression, and risk management, there are many potential pitfalls. When owners part ways, even in closely held companies where things have been going smoothly, the process can be highly complex.

As a business law and litigation firm that handles matters from formation to the finalization of company operations, Hendershot Cowart P.C. understands how challenging a business divorce can be. In addition to potential problems, we know owners in closely held corporations also have much to do to protect their rights, interests, and future endeavor when they terminate ownership interests, and split a business up.

Closely Held Businesses: Reasons for a Business Divorce

Closely held businesses come in many different forms. Whether it’s a professional practice, a retail or service-based business, or another type of company, not every business will always pan out or have the same partners. In cases where resolutions aren’t reached, a business divorce may be necessary.

Business divorce, which refers to any business partner break up, may be precipitated by a number of factors, including:

• Partnership and shareholder disputes
• Personal events (i.e. marital divorce, family break-ups, disability, death)
• New ventures, mutual separation
• Inactive business partners
• Disagreements, partner departure, etc.
• Business litigation / liability
• Business owner bankruptcy

As partners and co-owners confront major disputes, oppression, or issues that compromise their ability to continue operating or working together, due diligence and skilled legal representation becomes critical – for limited partnerships, limited liability corporations (LLCs), and any corporate structure. Aside from impacting any close personal relationships among business partners, a split up can significantly alter a company’s core vision and ability to function, and a partner’s professional future, when handled improperly.

Dividing a Closely Held Company in Texas

The objective in any business divorce is to reach reasonable resolutions among parties as efficiently and effectively as possible. In addition to standard matters, unique issues, disputes, and industry concerns can complicate further complicate how that objective is achieved.

Common issues to address when dividing a closely held business include:

• Business valuation to determine the value of a partnership or corporation, which may require the use of expert appraisers;
• Forensic accounting and investigation into key business aspects / assets;
• Tax issues and maximizing benefits;
• Ownership of trade secrets and intellectual property
• Employee relationships, contracts, and other employment law matters;
• Minority shareholder rights and laws regarding shareholder oppression;
• Drafting and negotiating terms for co-owners;
• Handling / resolving outstanding contracts or litigation association with a company’s operation;
• Complying with applicable regulations and industry laws (i.e. health and medical law regulations when dividing a medical business);

A business divorce can play out in many ways, which is why exploring available options with the help of experienced attorneys is crucial. Some of these options may include:

1. Negotiated Resolutions

• Buyouts and negotiated sale conditions which address payment type, sinking funds / cash on hand, ownership interests, and confidentiality, etc.
• Business dissolution and “winding up” proceedings (voluntary dissolution)

2. Buy-Sell Agreements / Contracts

• Enforcing or navigating terms of established contracts and agreements, including partnership and shareholder agreements and buy-sell agreements which address valuation method, procedures, right of first refusal, death clauses, retirement / disability, forced buy-out clauses, etc.

3. Squeeze-Out Reorganization

• Corporate reorganization, including mergers and acquisitions, transfers, etc.
• Dissenter’s Rights

4. Shareholder Oppression / Deadlock

• Bringing individual claims to resolve disputes or derivative actions on a company’s behalf
• Seeking appointment of a provisional director, custodian, or receivership
• Seeking injunctions to stop certain actions and resolve disputes

5. LLC Break-Ups

• Dissolution and tax, licensing, permit, debts, and contract implications

Preventing Disputes Before the Business Divorce

Many people enter into closely held businesses in similar ways to entering into a regular marriage: optimistically and ill-prepared. Because an ounce of prevention is worth a pound of cure, partners and co-owners should take steps to prevent disputes, minimize risks, and protect their rights and interests before any separation or talks of separation actually take place.

When assisting new partnerships and start-ups, our firm helps clients explore proactive options that can ease disruption and devastation when disputes and business divorces arise. These include protections like:

• Shareholder & Partnership Agreements
• LLC Operating Agreements
• Business Buy-Sell Agreements
• Proper Entity Selection
• Copyrights, Trademarks, and Intellectual Property Protections
• Licensing or Technology Development Agreements
• Non-Compete / Non-Solicitation Agreements
• Confidentiality Agreements / NDAs
• Work-for-Hire Agreements

Whether or not your closely-held company has contractual protections in place or not, Hendershot Cowart P.C. has the depth of experience and resources to help clients across Texas and beyond effectively navigate their business divorce. Call (713) 909-7323 or contact us online to speak with a lawyer.