When starting a business, the owners will usually start out with a good deal of optimism, goodwill and mutual trust, but disputes will eventually arise and, if handled improperly, could jeopardize the future of the business. The nature of the dispute varies but it is usually associated with sharing of profits, additional contributions to the business to cover losses, differing business strategies and goals, division of job responsibilities, efforts of each owner in running the business, interest by one owner in other business opportunities, or personality conflicts between the owners. If handled improperly, such disputes often lead to one owner feeling ignored, taken advantage of, cheated or bullied by the other owners, and the disgruntled owner often desires to end his involvement with the business and to be compensated for his losses.
Regardless of whether the complaints of the dissenting owner are meritorious, such a dispute could lead to financial difficulties for the business which may not have the funds to buy out the dissenting owner, or worse a lawsuit by the dissenting owner to dissolve the business and for breach of fiduciary duties and accounting against the other owners. Any dispute among owners has the potential to disrupt operation because enormous time, effort, and money will be redirected from running the business to fighting among the owners. Family relationships and friendships between owners often aggravate such disputes because they add a layer of complexity to the situation, usually in the form of unrelated deep-seated grievances.
A well drafted agreement between the owners at the inception of the business relationship will provide for concrete rules for handling such disputes and buy-out provisions for an orderly and fair buyout in lieu of litigation. Even if no such agreement exists, if the grievances are addressed early on and in good faith, the owners have an opportunity to either resolve the dispute or to draft a buy-out agreement to buy out the ownership interest of the dissenting owner.
There are four general ways to resolve such disputes between owners:
- Direct Negotiation: This is by far the cheapest and easiest way to resolve any dispute between owners. Parties should still retain an attorney to advise them about their rights and potential ways to resolve issues, but also engage in direct communications. The goal is to first understand how the other party views the situation and why, and then to explain their own position to the other party in a way that won’t exacerbate the situation. If the parties are interested in preserving a good relationship or are weary of litigation, skillfully negotiations may produce a quick resolution.
- Mediation: Mediation is a process in which the parties engage in a more formal negotiation. The parties typically select a mediator and meet with their attorneys and the mediator for mediation. The mediator is usually a retired judge or an experienced attorney who is neutral in the dispute, and is paid by the parties to attempt to resolve the dispute. The parties usually meet at the beginning of the mediation and then split into different rooms while the mediator shuttles back and forth to discuss various issues with each party. The goal of the mediation is not to determine who is right or wrong and therefore the mediator does not have the power to force the parties to do anything or to pronounce one party to be wrong or right. However, the mediator typically looks into the facts of the dispute and the applicable law, and privately advises the parties about any weaknesses or concerns with their case. Since mediation is confidential, mediation discussions and materials are not admissible in court. In a sense, when people mediate they have everything to gain and nothing to lose. Mediation is more expensive that simple direct negotiation between the parties but the skill of the mediator, the seriousness of the proceedings, and ideas generated by the parties frequently lead to a resolution of the dispute.
- Arbitration: The business dispute is submitted to a neutral arbitrator chosen and paid for by the parties. Some business disputes must be submitted to arbitration because the parties agreed in writing to do so through an arbitration clause in one of their agreements. However, even in absence of an arbitration clause, the parties can agree to arbitrate a dispute instead of litigating it in court. Unlike a mediator, the arbitrator’s job is to review the documents, listen to the testimony of the parties and their witnesses, review the law, and make a decision about who should win. The arbitration is a private proceedings but typically follows the same procedural rules as a trial in a court room, and is typically preceded by discovery and procedural fights between lawyers. Arbitration can be expensive and time consuming, but it results in a relatively prompt decision of the arbitrator that is binding on the parties, and which can be converted into an official court judgment. The parties’ ability to appeal an arbitration ruling is very limited, and therefore an arbitration award tends to be more conclusive than a court judgment resulting from litigation in court.
- Litigation: Unless the parties agreed to have disputes between the arbitrated, any disgruntled owner can commence litigation in court against the business and the other owners. This means that the dispute is public and a judge or a jury will get to decide who is right and who is wrong. While both litigation and arbitration are equally expensive, litigation in court can be lengthier because of the overcrowded court system, and the greater ability of the attorneys to delay and obstruct the proceedings. Like an arbitration, a trial will result in a judgment that is appealable, but the grounds for appealing a trial court judgment are broader. Litigation is often the only option if direct negotiations or mediation does not produce any results, and the parties cannot agree to arbitrate.
The Zurada Law Firm is experienced in handling all aspects of ownership disputes. Based on our inquiry and valuation of your individual situation, we will work out a personalized solution that meets your needs and gets you the best outcome possible.
The lawyers at the Zurada Law Firm represent business owners throughout the San Francisco and California Bay Area. If you have any kind of questions or concerns regarding your business, please give us a call at the number above or fill out our intake form. We would be honored to be your Bay Area/San Francisco attorney, and your first consultation with us is always FREE.