Expert: Timmy Chou - 3/3/2010

Question
My husband and I are 50/50 owners in a c-corp.  We are the only 2 employees.  He holds the title of President, and I hold all other titles (Vice President, Secretary, Treasurer).    We purchased this business from another husband and wife.  Though we did not write down assigned responsibilities, there was discussion and implicit agreement that we would divide the responsibilities in a similar fashion as they had.  Since commencing operations, my husband has been unable and/or unwilling to perform his responsibilities at an appropriate pace.  (He has a compulsive personality, and seeks perfection in everything.  He acknowledges this, but refuses to seek professional help.)  The end result is that, although he spends as many or more hours than I do working on the business, he is actually performing less than 20% of the total work involved.  This is a franchise business, and there are many other people performing the exact same functions who can attest to the fact that he is taking 10-20 times the hours that should be expended on his particular task.  It is inefficient, and our business is unprofitable.

This has ruined our marriage and is ruining our business, and we will be divorcing.  My question is twofold:
1)    He does not have the financial resources to buy me out of the company, but I do have the financial resources to buy him out.  He says he will refuse any buyout offer.  Can he do this?
2)   Having performed at least 80% of the duties since inception, I feel I am entitled to more than 50% of this business, or, at least, I should not have to pay him 50% of its value when he has contributed very little to it.  The business is currently worth substantially less than what we paid for it.  (We have lost clients due to his inability to get their product to them in a timely fashion.)
Thank you for any assistance you can provide.

Answer
Thank you for your question!

If you have looked at some of my previous answers you may know that I always advise questioners that mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.

I am not an attorney and cannot give you legal advice but can respond from my mediation, management and consulting experience.  Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

As you have discovered, one of the pitfalls of closely-held family businesses is that it is difficult to separate roles, and then it is also difficult to exercise business discipline when the situation requires it.  Unfortunately, there are no "corporation police" and you must enforce the rules on your own.  Often people are either not able to afford the legal bills or they are unwilling to get into a fight -- especially in a family business -- and bullies can merely go on with no checks and balances.  

You are right to presume that no one can compel anyone to "sell" their portion of a business nor is there a court that will "rule" on who did what in any private corporation.  So here is some practical truth to consider: often in these situations things are settled via the "golden rule," meaning whomever has the gold makes the rules, and often possession is nine tenths of the law, since an unhappy party must spend huge amounts of money to TRY and get possession back.  You will not easily be able to force him out if he refuses to cooperate, but you can control the business and its assets if you are aggressive about it.  

If you have no hope of effectively controlling the business, then to prevail in these situations you will almost certainly have to have a big fight, and you would have to hire a lawyer and get him to file a temporary restraining order and get the court to lock up the corporation assets and cash until a trustee or someone can sort it out.  It would be very expensive, especially if your husband resists the suit.  If you are resolved in your collective intention to change the balance of power, you could try and get a mediator to help you lay out the landscape to your husband and see if there is some cooperative way to make changes first:  an argument that basically says "the only hope for the business to make ANY money is for me to run it.  If you run it it will die and be worthless to everyone.  Therefore, I am willing to buy you out and pay you from the revenue IF you turn it over to me, otherwise I am walking from it or we sell it a huge loss and split the proceeds."

Make sure you are following these preparatory and proactive steps right away.  

1.  Be sure you are documenting a chronological timeline noting the management issues and conduct in the business, the objections and problems you have lodged, your research and the manner of dealing with them.  

2.  Review your existing documents.  Review whatever Bylaws, written agreements, operating agreements or other governing documents you have for guidance about the existing rules.  In most states, where there is no written rule in the corporation, the rules default to the statutory state established rules in the Commercial Code.  Try and get a copy of these rules and again reference and rely on them as you move ahead.  These Bylaws may give you more latitude than you realize.

3.  Go see a lawyer.  The local Bar Association usually has a referral service that will give you access to an attorney for a free consultation.  You should understand the legal landscape.  I would suggest that a possible next step would be to seek a restraining order from a court.  You can argue that your interests are being harmed and that your authority under the governing documents is being usurped.  You could ask for a restraining order and also ask for court ordered mediation.

4.  Time is not in your interests.  You must act before too much time passes.  You may be able to argue that the corporation should pay all the legal bills.  As you have seen, there is no corporation police.  The law requires people to act to enforce corporation law and if in the meantime all the assets are wasted, no one cares.  Additionally the law will assume that in a case where there is a problem and no one acted, then the parties did not object.

These are some ideas.  Feel free to follow up with additional questions.

For your general information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!


Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

Confidential, no public record
Limited exchange of documentation, information
Quick, don't have to wait for a court date
Arbitrators have expertise in the subject matter and are trained in conflict resolution
Cheaper than litigation
Preserves business relationships

Negatives of Arbitration

It's often a compromise, no 100% winner
Complex arbitration can be costly
If not satisfied, may litigate the arbitration procedure
Poor results with an unskilled arbitrator
Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

Neutral mediator can objectively suggest alternatives not considered before
Parties are directly engaged in negotiating the settlement
Can be quicker than litigation
Less costly than litigation
Preserves business relationships
85% of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

may not reach a binding decision
unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

a clear winner and loser
uses a prescribed set of procedures
more predictable outcomes
is final

Negatives of Litigation:

waiting for court dates can do more harm
usually more expensive than mediation and arbitration
part of the public record