As a 40 year business lawyer and advisor to my clients, I see themes in virtually all of litigation. The commonality is that business owners did NOT get appropriate legal work done at the inception of a business relationship with friends, family or third parties that they thought they “knew” and “trusted”. The start of a new business venture is exciting. This excitement sometimes spurs people into thinking that they should just get the actual business venture started and the rest will take care of itself. The “rest” that they don’t want to deal with is the hardest, most tedious part; i.e., what entity structure will be used, who owns what percentage of the entity, who will govern and how, voting parameters, minority protections, termination of the relationship, buy outs, divorce, death, disability, penalties for failure to make additional capital contributions or breach of the contract, how to deal with bad actions, financial transparency, law to be used and venue. These are just a few of the hard parts that clients (and to be honest, most people) don’t think about. The fun part is making money and starting the venture when the ideas are flowing and celebration is in the air! However, it is precisely when a venture starts making money that greed, envy, control issues and other nasty problems begin to surface. Invariably, someone is getting the short end of the stick in terms of financial and voting control, financial transparency, and the like.
So how to deal with a partner who will not account for the money, refuses to give you the books and records, or worse, says that these concern other investors and therefor all is confidential? Well, unless there are real parameters built into the governance documents, signed by all the business venture owners, the answer is expensive litigation.
Even with governance documents, if they are poorly written, litigation is often the only way to deal with the stalemate between business owners. Contrary to general perception, litigation is not Atticus Finch going to one hearing and arriving at the truth of the matter. Litigation involves discovery, production of documents, financial analysis, court reporters at depositions, subpoenas, general motion practice, too numerous to mention here, experts testimony, and lots of client time spent making everyday decisions that must be made with his/her lawyer and most of all, time away from the client’s business, family and friends.
How does one pay for all of this? Contingency agreements in business litigation are rare, simply because sometimes the facts are not in the client’s favor. So what to do? My advice is to hire a good transactional business lawyer and develop a working relationship with him/her at the inception of your business and continue the relationship throughout the business. Pay them well and on time and develop a business habit of discussing your business ventures with your lawyer. Most importantly, make sure that this lawyer represents ONLY you and not the business venture itself. A conflict of interest is to be avoided because it is difficult to be an advocate for the business and one of the owners. Each has a separate unique interest to be protected. If you have a sharp business lawyer advocating for your best interests in a new business venture, you will be far ahead of the game and most other business owners. The money spent at the start of the business venture will more than pay for itself when you need protection the most.