The Academy

Breaking Up Is Hard…Even In Business – Part 2

...continued from last week

  1. What limitations are there on an owner’s ability to pledge their equity interest as collateral for a loan
  2. Can New Co. employ an equity owner, and if so, what happens if New Co. fires them as an employee
  3. What events would cause an owner to have to involuntarily sell her interest to New Co. or the other members
  4. How an equity interest being sold would be valued and what the terms for payment of the purchase price will be
  5. What percentage of the equity must vote to approve certain significant actions by New Co., such as selling all of the assets, taking out a significant loan, amending the owners’ agreement, or dissolving New Co., and
  6. What percentage of the equity must vote to approve either a distribution of profits to the owners or require the owners to pay additional capital into the company.

For an owner, the owners’ agreement can be a dual-edged sword. In one place, the owners’ agreement supports your position, but elsewhere it allows most owners (which might not include you) to amend the owners’ agreement without your consent. 

An owners’ agreement might provide for New Co. to employ you and other owners, but it might also provide that you may be fired (by majority vote) and your ownership interest bought out, again without your consent. 

By majority vote, the owners could be required to pay additional money into New Co. (a capital call), and if you do not or cannot pay your share, the owners’ agreement says that your ownership interest will be re-allocated to any owner(s) who do(es) make that capital call, effectively forcing the sale of some, or all, of your equity interest, also without your consent. 
These things could be authorized by the owners’ agreement, which you agreed to at a time that you did not think any of it was possible or likely.

Regardless of the nature or source, when equity owners have conflict, if New Co.’s owners’ agreement does not provide good procedures for addressing the situation, then the owners are left with the singular avenue of commencing litigation. Business litigation is expensive, emotionally taxing and can result in the complete dissolution of the company. 

Accordingly, it is important that the owners ask the hard questions when going into the relationship, contemplate what a break-up would look like, understand their rights and duties, and get an owners’ agreement that is tailored to their specific needs, and provides the best structure possible to facilitate the operation of the company and a framework for the resolution of conflict.

Article written by Michael Long and sourced from Forbes