4. Engage in Similar Management Philosophy – With the inception of a private business, the owners immediately share common goals and means to achieve those goals by virtue of creating the company. Stay on task. As the business grows and is subject to normal business cycles, opportunities are presented to alter that management philosophy. Have a mission statement and stick to it. Follow precedent. Discuss openly and set short term and long range policies that all owners can live by and follow them in the operations of the business. For example, set your policy on reasonable salaries and when profits are available an appropriate profit distribution without taxing the capital of the company.

This post is part of an 8 post series.

3. Controlling Management Decisions Without Meaningful Input From Other Owners – The sole dictatorship when other owners are in management is usually not well received by those other owners. It is better to put decision making on the table, gather input and fulfill owners’ expectations of contributing to the management of the company. Sure, one person may need to make the ultimate decision or perhaps a controlling group in management such as a majority of the Board of Directors. Democracy must reign. A democracy includes the right to be heard. So let all owners be heard and contribute.

This post is part of an 8 post series.

2. Self-Dealing – When an owner commits company funds for their personal benefit, to the exclusion of other owners conflict arises. Particularly if the payment was disguised or hidden. Failing to properly account in the books and records which could cure the problem, (as long as other owners were treated fairly or equally), exacerbates the problem. Taking company funds to pay for your daughter’s wedding that otherwise could have been distributed as profits or used as operating capital does not sit well with other owners. Make sure company funds are used for company business and you always act in the best interests of the company.

This post is part of an 8 post series. See part 1 here:Part 1

As a business divorce lawyer handling owner disputes beginning in negotiation ending in litigation people ask me what I have learned about business owners avoiding business divorce. That is a far ranging question but there are certain common themes seen causing business divorce. Management consisting of directors, officers or managers in LLC’s, due to their position of control, are ultimately the people that cause the shareholders and other owners to suffer that may lead to irresolvable conflict. But here are some tips to avoid or reduce the risk of business divorce.

1. Trust – The unique nature of a private business and the relationship of its owners who usually serve in management requires faithful trust. The element of distrust is present in every business divorce. Distrust usually stems from not disclosing or even hiding financial transactions that may be self-serving or in taking questionable management positions and decision making unbeknownst to the other owners. So keep the books, financial and business records and decision making in front of all owners.

This post is part of an 8 part series.

Whether it be a private, closely held corporation of few shareholders, a partnership, or a limited liability company, those in control are with actual or perceived power may try to take advantage of their position.  Common themes develop that are repeated.  We should all learn from history as after all, history repeats itself.

Below is a common list of techniques used by owners to oppress other owners of the company to their advantage.

1.    Management control through voting.
2.    Unequal compensation.
3.    Withholding dividends for other profit distribution.
4.    Taking advantage of a superior financial position to loan money to the company on advantageous terms or dilute interests by additional capital/equity contributions.
5.    Termination of employment and compensation and benefits that go along with the employment.
6.    Elimination of a shareholder from any effective say in management by actions, informal or formal voting, suppressing management contribution or eliminating the shareholder from formal management as a director, officer or management.
7.    Paying profits to certain owners in the form of high compensation while not paying profits and higher compensation to other shareholders.
8.    Withholding information about the management decisions or finances of the company.
9.    Making contracts, leases, or loans, favorable to controlling shareholders.
10.    Paying personal expenses with corporate funds.
11.    Siphoning off profits by having other companies or family members provide services at rates not favorable to the company.
12.    Taking personal advantage of a company opportunity.
13.    Entering into favorable and lucrative employment contracts to the exclusion of “at work” shareholders.

In my experience, there is usually a combination of these squeeze out techniques that leads to oppression of shareholders or business owners when one person is in a position to take advantage of the situation.  When a person has control of money or assets that is being held for the common good or other owners of the business, the law recognizes that person is a fiduciary and establishes a fiduciary relationship.  While decision making in a company can be protected by the Business Judgment Rule, an exception to the rule is when the controlling person acts in their self interest or otherwise breaches the duty of loyalty.  Application of the Business Judgment Rule exists where the fiduciary acted in good faith, in the best interests of the entity and in most cases as a reasonable person in that situation would act.

These common squeeze out techniques lead to breaches of fiduciary duty that likely cannot be saved by the Business Judgment Rule protections.