COVID-19 has had far-reaching implications for businesses, large and small, both direct and indirect. While publicly held companies such as airlines and large coffee chains making the news today typically have a diversified investor and owner bases with a corporate structure and management to address their business issues, most closely held businesses do not. Instead, many closely held businesses have two or three "partners" and one or two major investors. So, while closely held businesses may face a similar economic environment and set of business challenges as a result of COVID-19, they may also have to address governance and partnership issues.  

When business is profitable, closely held businesses usually run smoothly. During the current COVID-19 pandemic, however, when things are poor for most businesses and extremely bad for nearly all the rest, closely held businesses may respond in a dramatic fashion. This is because individuals are involved, and individuals often react differently to times of great stress or change. When such individuals (or their investors) have a different willingness or ability to tolerate business pain, some or all of them may seek a way out via a "business divorce."

So, what is business divorce? It is not dissimilar to a marital divorce, except it is a time when business partners or investors want or need to separate—a common situation. After all, while 50% of personal marriages end in divorce, an even greater percentage of business partnerships and investor relationships come to an end. And when one or more of the partners move to separate, the path forward can be just as costly and involve just as much time, pain and drama. 

When a lawyer is engaged to represent one of the parties, that lawyer should anticipate a complex situation with unique players and a range of (often long-simmering) issues. It is impossible to unscramble an egg, and, absent extremely clear procedures to follow that have been documented in advance, it can be very difficult even to find a starting point of agreement between or among the parties. This is especially true when the company involved has little or no paperwork.

Sometimes the parties involved are unable to identify any official election of the board of directors or even who is the president of the corporation. On top of this, even when documentation is in place that ought to be a reasonable road map for a business divorce, the parties may disagree on nearly everything. They can disagree as to what "retire" means and how to value a minority equity position, and they even can disagree whether or not the documentation is valid or enforceable at all.  

First, it is critical to understand the client's goals and the available facts before you can advise the client. Sometimes the client is not sure what he or she wants to achieve, and sometimes the client's goal is unrealistic. In both such cases, you will want to help the client work through the several options that you see based on a review of applicable partnership and/or corporate law and any and all facts you can divine.

Especially when business divorces involve long-standing relationships or family, you may also have to go into discussions with counsel for other parties with an open mind, as their client(s) may have different recollections and documents and/or a set of facts that might change your recommendations and approach. It is often important to understand the underlying business as well; a lawyer should be familiar with investment and other business documentation and know how to read a financial report.

Second, it is important to recognize that not all business divorce matters have to result in a full separation. For example, in some cases the parties are able to restructure their relationships such that they are all happy enough to continue in the enterprise together. Other examples would be when a partner or an investor gets bought out, or the parties agree to solve their disagreements by selling the business and each party leaving with a pre-agreed share of the proceeds.

All of these results can be implemented without the parties resorting to litigation. Of course, a significant number of these disputes do end up in court. If your matter is put before the court, the suit could be simply to have the court rule as to the documents and facts in hand and determine what is "fair" to the parties, or you could be seeking dissolution of the business to be approved by the court. You also could be seeking punitive damages for forcing your client out of the business with a wrongful plan. Still, there will be a number of settlement opportunities available at all stages of the litigation.

Here is a non-exhaustive list of reasons for a business divorce, each of which could be inflamed by the effects and timing of the current pandemic and associated government "opening" and "closing" edicts:

• Perhaps one of the partners/shareholders wants to move to where extended family lives, stop traveling, slow down a bit or even retire: In such a situation, it is very common that (i) the party who wants a change will still feel he or she deserves to receive the same payment as before from the company, and (ii) the other parties involved or invested in the business will be unhappy with the relocating or "slowing down" party. This isn't always contentious, and, if cooler heads prevail, is often solved with a buyout or a restructuring of the relationship. This could be one area where the pandemic is a prime motivation for the changes, as people decide not to travel in airplanes or want to move their families to a location that is less affected by the virus. 
• Investors tire of an investment, or a company tires of an investor: The current pandemic is likely a touchstone for many investors who need to decide where their investment dollars will be most effectively parlayed, and a company bringing in new capital may need a current investor to cooperate or leave. 
• Family disputes, which may or may not be about the business: Sometimes it is when one family member feels he or she is not being treated well or as well as siblings or cousins. Sometimes a family member has to work at the company while siblings simply collect "their share" of the profits. Sometimes a family wants a "bad egg" out of the family business. Whatever the situation is, the stress of having a business shut down or trying to decide how to reopen can exacerbate any existing issues within a family business dynamic.

How can one avoid a business divorce? With careful planning, it can be done. As with a marriage between two people, it is often wise to put a "prenup" in place. In fact, when first starting in business with one or more partners (even ones you have known for years), it is always smart to cover some of the most obvious "what ifs" and fully document the relationship(s) of the parties and the rule book for operations of the business and the corporate entities involved. It is just as important for an investor to identify when the investors may "exit" the deal or have the company be sold (and valuable for a company to identify if it can buy an investor out). 

Today's economic environment and ongoing pandemic have put decision makers in some tough spots. People can logically disagree on how or if to "open back up," partners may want to move out of town or stop traveling, and other partners may want to consider alternative sources of income in new business arenas. Investors may be threatening to take over the business. All these possibilities and more may arise at any time. Business owners and investors should therefore understand the very real potential for an uptick in business divorces and may wish to examine their current positions with respect to their own partners, investors, businesses and investments.

Maybe it's time to put together that LLC operating agreement? 

Lee Weinberg is a partner in the Los Angeles office of Weinberg Gonser. He regularly handles partnership disputes and business divorces associated with privately held companies.