Like any relationship, business partnerships can be susceptible to disagreements. And just like the breakdown of a marriage or common-law relationship, business breakups can be painful and costly.
“When things are going well and they’re busy, you’re not thinking about what you would do if they fall apart down the road,” says David Contant, a partner at Nelligan O’Brien Payne LLP and a certified specialist in civil litigation.
He regularly litigates what some people refer to as “business divorces” or, the severance of a business relationship. Though they are regrettable, there are steps business owners can take to avoid a complete breakdown and to protect themselves in the event that one does occur.
Contant recommends the following:
Prepare for the worst
Even the most cautious of business owners has been known to overlook their founding documents. With little to no runway in a company’s early days, resources are typically allocated to marketing, product development and labour instead of the legal fees required to draft a partnership or shareholder agreement.
Unfortunately for many small and medium-sized business owners, this legal document can mean the difference between an amicable split or a messy civil dispute down the road.
Though these agreements are tailored to the business they cover, they typically include the following:
- Who owns how much of the business;
- How to divide the profits and losses;
- How long the partnership will last and what to do if a partner dies or withdraws;
- Rules for how decisions will be made and disputes will be resolved.
As Contant explains, drafting the agreement at the start when things are going well is much easier – and likely more equitable – than it will be to divide the business down the road without one.
Similarly, business owners should carefully document any strategic goals they may have. Not only is this good business sense, but it also provides a guide with which to settle any future disputes over what direction to take the business in.
The worst-case scenario
Business breakups can stem from a number of issues, ranging from disagreement over the strategic direction of the company to simply wanting a partner out.
“A lot of the time, personalities drive litigation,” says Contant. “A falling out could be purely over personality conflicts.”
For business partners, an early warning sign that a relationship is crumbling may be their exclusion from key meetings or decisions.
Thankfully, under the Ontario Business Corporations Act, there is a remedy for the unfair treatment of stakeholders within a company. The Oppression Remedy may be used by stakeholders – including shareholders – to seek remedies in the event they’ve been treated with prejudice or their interests have been unfairly disregarded.
When a business divorce ends in litigation, it all comes down to the evidence each party can provide.
“Litigation rises and falls on evidence,” says Contant. “If you think that things are blowing up, you want to get your hands on any documentation that you’re entitled to.”
This can include anything, from text messages to emails or even speech transcripts. Litigators will also call witnesses who can speak to the intentions and agreements of the partners in question. In many cases, Contant explains, these witnesses include former business partners who no longer have a stake in the company and can therefore provide impartial testimony.
As with so many things in litigation, business divorces come down to contingency planning.
As Contant puts it, “hope for the best, plan for the worst.”
For more information, please contact our Commercial Litigation group.