COVID-19 Pandemic: An Increase in Business Divorce?

May 19, 2020

One need not have a specialized “barometer” to anticipate an onslaught of partnership storms for closely held businesses. Similar to the way in which sociologists and family counselors have predicted unfortunate spikes in marital divorce rates across the nation, all largely the result of our global pandemic and our ongoing attempts to adjust to this so-called “new normal,” we too have seen increased rancor among business partners. Interestingly, the unrest is not limited to businesses that are failing or otherwise suffering. Regrettably, we are also seeing increased partner discord in healthy thriving enterprises.

In the wake of COVID-19, much has been written about force majeure, frustration of purpose, impossibility, material adverse change outs, management deadlock, judicial dissolution and other atypical (i.e., extraordinarily difficult to achieve) exit strategies. We know that a number of our clients and many others continue to theorize about them. Nonetheless, we believe that absent the right and narrow set of facts, the successful implementation of these exit strategies is remote in the business partnership sector. Simply, although these are extraordinary times, there is no certainty that these extraordinary legal remedies will be awarded in the midst of this pandemic.

What this means is that in many, if not most instances, business relationships and their underlying agreements are not going to simply be “set aside,” with some nifty equitable division of both assets and business prospects to follow. And so, it is incumbent that all business partners experiencing fellow shareholder disharmony, deal with their operative agreements in their business relationships, with heightened scrutiny and deliberation, because their partnership and underlying agreements are likely here to stay, notwithstanding the unprecedented economic and existential threats posed by this pandemic.

If your relationship with your partners is beginning to erode or has eroded, if there is something gnawing at you (or for that matter, gnawing at one or more of your partners) regarding the manner in which your business operates, if you are having trouble agreeing on even the smallest of line items or if one or more of your partners is no longer carrying his or her weight, now is a good time to carefully review your operative business agreements, such as your corporate shareholder agreement, your limited liability company operating agreement, your partnership agreement, or your joint venture agreement prior to receipt of formal notice, an unwelcome lawyers letter or the like.
We know our advice may be unpleasant. After all, operative agreements often sit in a draw, never to be dusted off, much less read, sometimes entirely forgotten about, just like a testamentary will, health care proxy or life insurance policy. But with the expectation that a spike in business disputes is inevitable, ignoring these documents is no longer a viable option.

Lastly, and most importantly, partner disharmony is not uncommon, at times can be healthy and therefore disharmony does not mean business a breakup is inevitable. In fact, well-crafted agreements often provide useful roadmaps for avoiding dissent, and to the extent a “parting of the ways” is inevitable, properly drafted agreements typically provide mechanics by which business separation can be achieved both efficiently and in a private manner, without court intervention or public scrutiny.

We have worked though many business controversies, where, more typically, business divorce was avoided, and harmonious business relationship were restored. Planning, calm minds and a little luck is crucial. So, open the draw, take out the agreement and get ahead of the problem. These are extraordinary times and there is no room for delay.

Attorney Advertising. The information contained in this Legal Alert provides a general summary of the topics covered and is not intended to be and should not be relied upon as legal advice. You should consult with your legal counsel for advice and before making legal, business or other decisions.

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