Distilled down to its most basic essence, business divorce is the legal separation of the owners of privately held business entities. Each of these elements has specific implications for business divorce as a practice area, which is addressed below, albeit in slightly different order.
One of the primary characteristics of business divorce as a practice area is that it involves only privately held entities. This has two primary implications. Unlike cases involving publicly held companies, these cases usually involve the actual founders of the entity, and they often are not able to litigate their disputes with “other people’s money.”
Given that business divorce cases often involve the actual founders of the entities, or perhaps their children after the death of the founder(s), or even partnerships between family members or friends, they tend to involve a greater sense of personal pride in the enterprise than cases involving publicly held entities. Moreover, given that the owners often are family members or longtime friends, the disputes involve a greater degree of personal animosity and rancor than disputes relating to public entities. Unlike the famous quote from The Godfather, these disputes are “personal, not business.” The business divorce practitioner must be aware of such dynamics in order to represent the client efficiently because they may be more important to achieving a resolution than a simple analysis of the bottom line. The attorney must also be open to acting as an amateur psychologist in these types of cases by encouraging the client to focus on the big picture rather than personal animosities.
Business entities are creatures of state law, so not surprisingly, the process of ending a business relationship also is governed by state law. It really does matter if all your exes live in Texas. Equally unsurprisingly, state laws governing the termination of business relationships vary greatly. Complicating matters further, state laws authorize different types of business entities (e.g., corporations and alternative entities), and the laws regarding the termination of relationships under these different forms of entities differ greatly. In other words, with 50 states, there really are 50 ways to leave your lover, or business partner. (Of course, federal and state tax law could also be significant in the division of an entity’s assets.)
Legal Separation of Owners
Although it is certainly true that business divorce is not synonymous with or limited to “dissolution” of an entity, it is equally true that business divorce would not exist without dissolution. As indicated above, dissolution is a matter of state law. If the business partners have set forth their wishes regarding how their interests will be separated upon divorce in their governing documents (i.e., a prenuptial agreement), courts normally will follow those agreements, regardless of the type of entity involved. Where they have not done so, statutes usually will govern, again regardless of the type of entity involved. Where the statutes are inadequate to the task, common law will fill the gaps (e.g., equitable dissolution of LLCs in Delaware, which may be available even where statutory dissolution is not).
The entire article, "Business Divorce: New Practice Area or Plain Old Commercial Litigation?" is worth reading in detail, as is the outline of Kurt's presentation "Business Divorce: Dissolving LLCs Under Delaware Law."
Kurt M. Heyman is a founding partner of Proctor Heyman Enerio LLP in Wilmington, Delaware, where he practices corporate and commercial litigation. He is the editor and co-author of Litigating the Business Divorce (BNA 2016), also co-authored by (inter alia) Business Law Basics co-author and Berger Harris partner Brian Gottesman.