■ Member Notes
■ Member Notes
take care to focus on files demonstrating all aspects of the financial performance of the company and the value of your interest . Remember that as a shareholder , member , or partner in a business , you have broad rights to access and review all of the business ’ s records and documents . Third , begin to think about your next phase , but do not take formal action toward a new venture such as forming a new ( competing ) company , reaching out to existing clients , or downloading extensive client data , until you meet with competent counsel and understand your rights and obligations .
Fourth , and very importantly , honor the written agreement ( s ) you do have . Continue to follow the corporate formalities that exist , such as holding meetings and voting on actions to be taken by the business . Resist the urge to act precipitously by unilaterally taking control of the business by firing a co-member , stopping their salary and benefits , or locking them out of the business without the advice of counsel . It is often the case that an agreement between principals contains a notice and cure provision . Moreover , taking such “ self-help ” can have disastrous consequences in litigation that ensues thereafter . Indeed , depending upon the situation , your breach could relieve the other party of performance altogether , including in certain situations possibly relieving that person of a requirement to provide capital to the business or freeing that person of any limitation on their ability to compete against the business .
CLEAN Exit : Negotiating the Departure and Buyout
When trouble develops and it is no longer possible to work together , the principals of a closely held business should strive for a clean exit . Such an exit may occur through a decision of the parties or as the result of resolution in court . Whether leaving on your own or being bought out , one must strive to clearly define the obligations on both sides . Here are some of the key considerations for negotiating and documenting a “ CLEAN ” exit :
◾ Clearly define the financial obligations on both sides and the compensation to be paid in the future to the departing principal . The sum to be paid , how it is to be characterized , and when , must be articulated and set in writing . If the paying party is providing security for the payment of its obligation , attention should also be paid to ensure that the security can be acted upon if necessary . For instance , in a closely held LLC or corporation , it may be possible to negotiate an agreement where the remaining members / shareholders pledge their member interests / shares as collateral for payment . You will want to take the necessary steps to ensure that such a pledge is enforceable and the security interest in those interests / shares is perfected ( i . e ., subject to no other claims ). If at all possible , address all contingencies and leave no wiggle room ;
◾ Liability issues must be squarely addressed before departure . If you are the departing principal , it is going to be important that you obtain a release from the entity ( ies ) and co-principals for past and future liability stemming from the company operations . It is also important to be removed from any financial obligations the company may owe to lenders , bonding companies , factors , mortgages , etc ., and to extinguish any personal guarantees you may have given on behalf of the business ( such as to a landlord or a lender );
Breaking up with your co-principal does not have to be difficult or expensive . The key is proper planning .
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◾ Enforceability is key . What good is a buyout agreement if you do not have a strong mechanism to get paid in the event of a default ? If you are the departing principal , you will want to take care to delink the payor ’ s payment obligation from any obligations by the departing member ( i . e .., confidentiality or non-disparagement ), lest you create the temptation for the payor to falsely claim a breach in order to cut off future payments . There are a multitude of strategies to streamline enforcement , including alternative dispute resolution rather than litigation to keep the legal fees and costs down , and a provision awarding attorneys ’ fees and costs to the victor so that the parties are incentivized to be well-behaved ;
◾ Accounting . Behind every good trial lawyer is strong accounting support , and our firm routinely calls upon several trusted accounting firms ( CIANJ members ) in this process . You must ensure that you have received proper accounting advice concerning the transaction with three principal goals in mind : 1 ) create the maximum financial benefit to you ; 2 ) be sure that you have properly valued your ownership interest ; and c ) ensure that you have considered all tax ramifications of the transaction and structured the transaction appropriately to minimize any tax liability ; and
◾ No trap doors . We are often amazed to see buyout agreements come across our desk that fail to pre-emptively address potential traps for the departing principal , resulting in litigation down the road . One example that comes to mind is a failure to address whether there are lingering “ shareholder loans ” on the books of the company . In the negotiations for a buyout , one must fully vet and understand the disposition of those loans , as the forgiveness of such a loan can create tax consequences to the departing principal . Also , if you are the party being bought out , you will want to accelerate the payment of financial obligations if there is a change in control of the company after the signing of the agreement . In other instances , parties fail to draft enforceable restrictive covenants , so as to ensure that a departing principal will not be able to compete with the business for a defined period after being bought out . Those are just a few of many traps that may exist , and those trap doors must be nailed shut .
In short , breaking up with your co-principal does not have to be difficult or expensive . The key is proper planning . The ugliest New Jersey business divorce cases tend to be the ones where one or more of the principals took matters into their own hands without the benefit of competent legal counsel .
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