I. Introduction

As a business owner, disputes can arise for a multitude of reasons.

Your rights may differ based upon the type of dispute you have, the structure of your company, and the language of the documents governing the agreement between you and your business.

Disputes can arise over matters such as: distributions or lack thereof, equity vesting schedules, management responsibilities, adverse decisions by the company, allegations of misconduct, conversion of company assets, or violations of the company’s governing documents, to name a few.

Whether you’re a minority shareholder of a corporation, a managing member of an LLC, a partner in a partnership, or a co-founder of a start-up, there are numerous measures you can take to resolve a business dispute without having to initiate a costly, public and embarrassing litigation.

The tactics and strategies I’m about to share with you are the same ones my office implements in order to achieve results without having to initiate court proceedings.

*Note to the Reader: While these tactics are presented for you as a guide while you meander the business dispute process, they should by no means be relied upon, and are not a substitute for consulting with a lawyer.

Every document, every company and every state has a different language, and it is imperative you understand what your specific rights and obligations are based upon an analysis of your personal situation.

Using these tactics does not guarantee that you will avoid litigation - but, if you review these strategies in depth and follow through on their implementation, you’ll be much better positioned to enter into a negotiation that should hopefully yield favorable results.

And when you do obtain those results, contact my office and let us know!

-Ms. Lisa Esposito, Esq.

II. Review Your Company Agreement

Every start-up, corporation, partnership, LLC etc. should have a Company Agreement outlining the Company Owners’ relationship to the Business.

For a corporation, you may have signed a shareholders’ agreement, for an LLC an operating agreement, for a partnership a partnership agreement and so-forth.

It is imperative that you first review this document to understand what your rights and responsibilities are as an owner of the Business.

Some of the primary provisions you should look for and understand are described below.

1) How Does the Company Make Decisions?

Decision-making in a business can be set-forth in different ways. If you’re an LLC, a managing member may have authority to make day-to-day decisions for the business, while a majority of members of the Company may be required to vote on matters of larger import, e.g. a merger, acquisition, or sale.

Similarly, a corporation may have multiple officers in place to run the daily affairs of the business, while the Board of Directors (often consisting of shareholders and officers) is responsible for making decisions that impact the business at a higher level.

Find out what the decision-making process is for your specific business.

Review all clauses that reference shareholders rights, members rights, management and responsibilities, and voting rights.

Find out (a) who runs daily affairs of the business; (b) who makes larger decisions concerning the direction of the business; and (c) how such decisions are to be made.

Is there a specific quorum that must be reached prior to a vote being made? Must an in-person meeting be held? Does a resolution need to be passed? Understand the mechanisms for decision making within the Company before you present your dispute.

That way, right off the top you’ll know whether your rights have been violated, and if you’re uncertain, you’ll have the ability to request confirmation that protocol was followed.

2) What Does the Company Document Say About Disputes?

The second step for navigating your dispute is to understand the mechanisms for dispute resolution.

Nearly all governing company documents contain a Forum Selection Clause that outlines where, when and how a claim can be brought. Often a choice of law provision (e.g. which State’s laws will govern the dispute) are set forth in the same paragraph.

For example, a Forum Selection Clause might state that all claims arising out of the Company Agreement are to be brought in State or Federal Court and are subject to New York Law. In that case, you’ll know that absent a negotiated resolution or an agreement between the Parties to do otherwise, your claim will wind up in the public court dockets.

Alternatively, a Delaware Corporation operating in New York might contain a clause stating that all disputes are to be governed by Delaware Law, and shall be resolved through binding arbitration with the American Arbitration Association.

In that case, the courts are off limits excepting actions specifically brought for injunctive relief, e.g. to attach bank accounts, freeze company assets or enjoin a wrongdoer from continuing illicit conduct (for more information on how to initiate these emergency measures, you may contact our office.

Sometimes, agreements will require mediation as a prerequisite to litigation or arbitration. Mediation, which is non-binding, is often an expedited means of resolving disputes before a neutral mediator, who is typically an attorney or retired judge. Whatever your particular scenario may be, it is imperative that you understand where your claims will wind up in the event a resolution cannot be reached. Once you do, you’ll be able to strategize accordingly.

3) What Other Clauses Are Relevant to Your Particular Issue?

Depending on your specific issue, there may or may not be additional clauses set forth in the Company Agreement that must be reviewed.

For example, matters that are often addressed in Company Agreements include mechanisms for buy-outs, stock transfers (to third-parties, back to the Company, or both), vesting schedules, and requirements for how to determine a valuation prior to the sale of shares.

Often you’ll find provisions on confidentiality of company information, branding, and know-how, but you may be less likely to find a clause specifically addressing what rights you have to solicit clients of the Company in the event you exit the business. Some matters might not be addressed at all , such as what specific measures should be taken when a manager is committing corporate waste, fraud, or is in breach of fiduciary obligations owed to you and/or the business.

Whatever your particular issue may be, a thorough search of the company document to see if your issue is addressed is an imperative step to take prior to initiating a dispute. Once you understand your rights and obligations in the Company, you can take the next step towards reaching a resolution of your claims.

4) New York Company Laws and Extemporaneous Writings

Sometimes it is the case that company documents simply do not exist. While this is typically suggestive of a disorganized business, it nevertheless does not eviscerate a company’s obligations to you.

There may also be scenarios where your particular issue is not set forth in the Company Document, but is nevertheless covered by one of the New York Company Laws.

If you are in this situation and are a member of a New York LLC, you have protections afforded to you under the New York Limited Liability Company Law, which you can access here.

Similarly, a corporation in New York is governed by the New York Business Corporation Law, which you can access here.

Partnerships are governed by the New York Partnership Law, accessible here.

Moreover, without a company document a Court will be more inclined to consider extemporaneous evidence, e.g. emails, text messages and other exchanges which appear to set forth the relationship between the Parties.

Therefore, if you do not have a company document or it is silent on issues that are not otherwise addressed in the relevant New York Company Laws, it will be important for you to maintain and compile all other writings suggestive of the nature of the business relationship.

III. Addressing and Resolving Your Claims

1) Confirm What You Want from the Company, and What You Are Willing to Cede

At this point you have now (a) Reviewed the Company Document; (b) identified the provisions relevant to your dispute; and (c) as necessary, gathered relevant writings and reviewed the relevant New York Company Law.

The next step is to write down precisely what you want from the Company.

A good way to approach this situation is to set-up two columns, A and B.

In column A, list everything you would like to get out of the Company in an ideal world. In column B, list the concessions you anticipate the other side wanting as part of a resolution with you. Next, confirm which items in column A you could do without if you were able to resolve the dispute now, even if you feel you are entitled to everything. Then determine which items in column B you don’t mind ceding to the Company/other parties involved.

2) Prepare a Demand Letter Outlining Your Claims

Now that you can visualize everything you want out of a resolution with the Company, and what you are willing to cede to the other side to reach a resolution, it is time to prepare a letter outlining your demands.

A demand letter is a pre-dispute letter sent under confidential letterhead to (a) set forth your allegations against the Company/Shareholders/Partners; and (b) list your demands for what you want in order to avoid a lengthy and costly dispute.

Your demand letter should be professional, concise and firm – it should (a) succinctly set forth the facts that have led to the dispute, (b) list the relevant provisions of the Company Document in your favor (or the relevant New York Company Laws and/or writings in your possession that you allege govern your dispute), and (c) itemize a list of demands that must be satisfied in order for you to enter into a Settlement or Separation Agreement and avoid litigation.

A rule of thumb is to put a firm deadline in the demand letter for when you will cease negotiating and proceed to dispute resolution in the event a response is not received.

3) Negotiate Terms

Assuming your adversary responds to your demand letter, it is now time to begin the negotiation process.

More often than not, a Company and/or its Partners/Officers/Shareholders etc. do not wish to proceed to lengthy and costly litigation, especially when the wrongdoing is clear.

Take advantage of this knowledge to negotiate from a position of strength; preferably via phone call, remind your adversary of what your claims are and what you anticipate will be necessary to avoid a dispute.

It is important you don’t concede any terms just yet; let the other side come back to you with a counter-offer to your demand. Then, it’s up to you to review your columns and decide which concessions you are willing to make, and which are deal breakers for reaching a resolution.

If and when you do reach a general understanding of what the resolution will look like, it is always good practice to prepare the original draft of the Settlement Agreement.

Preparing the first draft allows you to call the shots, put together terms that are favorable to you, and avoid having to delete and alter many provisions the other side discreetly injects into the document in an effort to preserve additional rights not discussed between the Parties.

Assuming you are able to finalize a document that is satisfactory to you, all appropriate parties can sign and the Agreement may be enforced on its terms.

4) What to Do When There is Deadlock or No Response

i. If You Are Deadlocked – Request Mediation

Sometimes a demand letter elicits a response, progress is made, but final terms agreeable to all sides simply cannot be reached.

Other times, a response to a demand letter is callous, cold and sets the stage for a lengthy litigation.

In either one of these instances, if it is clear the Parties are not going to resolve claims on their own, it is a good practice to recommend mediation between the Parties.

The modern trend towards mediation is well-founded, as more and more companies include mandatory mediation provisions in Company Agreements prior to the initiation of litigation or arbitration.

Why Mediation?

As previously mentioned, Mediation is an informal process that allows the parties to appear before a neutral mediator to set forth arguments and justify the end results sought.

A mediator typically listens to both parties’ claims, and works with each side in order to broker a final resolution.

If no resolution is reached, the mediator can provide non-binding recommended terms for settlement, which essentially replaces an order of a court or decision by an arbitral body.

The benefit of mediation is two-fold:

(a) It allows the parties to potentially resolve claims via a brokered settlement while saving a fortune on litigation or arbitration fees; and

(b) Even if a resolution is not reached, it gives the parties an idea of how a jury or arbitral panel might decide the case if it were to proceed on the merits, which in turn encourages a settlement on terms similar to the recommendation made by the mediator.

ii. If There is no Response – Send Initiating Papers to Your Opposition

If the Company fails to respond to your demand letter, you still have action-steps you can take prior to initiating a dispute in a public forum.

For example, you can prepare a draft complaint which you allege will be submitted to court absent a response, or prepare a Request for Arbitration that you submit to the other side, outlining your Statement of Claim.

In either scenario you will show your adversary that you have taken the necessary and arduous steps required (e.g. the drafting of documents) to begin the dispute resolution process.

While this mechanism does not always work, receiving a completed document ready for filing often raises concerns and is prima facie proof that you are serious about pursuing your case.

If this method is successful for you, you can then begin the negotiation process and/or suggest mediation as a mechanism for resolving your dispute.

iii. If All Else Fails – It’s Time to File

If none of the strategies above yield results, it is probably time to file your case. Whether you proceed to litigation or arbitration, cases do often resolve at varying points in the dispute resolution process.

When entering into any dispute it is always important to do your due diligence, understand the documents you signed, know the laws governing your dispute, and disclose all relevant evidence -good or bad- to your attorneys. With good counsel (and perhaps on your own), you can make a strong and formidable case before your adversary to justify an award in your favor.

IV. Conclusion

Business Disputes can be a challenging and confusing labyrinth to navigate. It is imperative to put aside the emotional aspects of a business divorce and focus on results for the long term that are best for you.