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Corporate Divorce: The Woes Of Splitting From Your Business Partner

april 23, 2021 | operating a business
corporate divorce

Splitting from your partner can be a difficult, emotional process in business as it is in family life. Someone you may have cared about and counted on is no longer a good fit for your company. Perhaps you no longer share the same vision for the business or they’ve lost interest altogether. Or, as is often the case with start-ups, your best buddy from U of T, who was great at packing cakes in your basement when you started, does not have the skillset to manage the co-packer you need right now. Regardless of the reason, sorting out the details of a business partner's divorce can be complicated.

The Signs

When you first started your venture, things may have been overwhelming, but they were also simpler because everyone did everything. If you opened a restaurant with a friend, you were the cooks, the cleaners, the cashiers and the wait staff. If you needed an e-commerce site, you rushed to learn code and would stay up for two straight weeks to get it done. But then suddenly the orders start coming in, and there are decisions to make and actions to take: you need more people and more space; there are leases to sign, partnership deals to close, people to pay, IP to protect, financials to set-up, contracts to have drafted, money to raise, marketing campaigns to create, and a myriad of municipal, provincial and federal laws to comply with.

And you and your partner have stopped communicating.

This is sign one.

Or perhaps your partner is using company funds like their own personal bank account. This is sign two (and a big red flag). Other signs that a split may be needed do not differ much from a personal break-up. You disagree about money – how to raise it and how to spend it. Your partner is not participating in key decisions, is hard to find or hard to deal with. You want to expand to the US and they want to remain in PEI – all of these are signs that together, you may not be what is best for your company.

A split is needed. Now what?

Now that you’ve seen the signs and know that a break-up is necessary, what now? First, it is always very strongly advised to seek experienced legal counsel and LegalShield can help you there. Together, we would review the details of your current circumstances: How many partners are there? Do you have a valid shareholder/partnership agreement in place? Are you the majority shareholder? Are you the one staying or going? And all the other details that are important when setting out a strategy for the exit of a partner. Then we would help you put this strategy in place.

 

When devising a plan for a partner break-up, it is crucial to assess what the impact will be on the company itself. Having a valid shareholder/partnership agreement right from the start is key to avoiding problems down the line. In some circumstances, you must have one to create a general or limited partnership. If you have one that is properly drafted, it should describe what actions could be taken if a partner is involved is something illegal versus if they pass on or want to retire, for example. Regardless of the type of company you have set up or your situation, at LegalShield Canada, we can draft an agreement that anticipates the various scenarios that may occur over the course of your partnership. This can save partners a lot of time, money and heartache.

Once you have a lawyer to consult with, it’s time to assess all the available options based on your current situation. This includes examining the shotgun clause, right of first refusal, purchasing your partner’s ownership interest, having a valuation expert determine the value of your company, joint liability, employment issues, non-compete and non-solicitation concerns, and if you are two partners with a 50-50 split, a neutral party may be needed to run your business day-to-day while the break-up is being worked out.

The Take-Away

Whether you are the partner who stays or goes, and regardless of whether the split is between individuals or companies or a mix of the two, seeking legal advice in these cases is extremely important. There are many variables to consider and ongoing expert counsel will make the process easier for you. LegalShield can guide you from seeing the warning signs to separation.

 

Articles on the LegalShield.ca website are for informational purposes only and do not constitute legal advice or opinion in any manner. Laws mentioned in the articles vary from province to province. Any links to third-party sites in our articles are for general information purposes only and LegalShield is not affiliated with, nor does it endorse, the content of linked sites. It is always advisable to seek legal counsel - and LegalShield can help.

Let LegalShield Negotiate Your Own Business Divorce Today.