Mediation is the Rational Solution for Business Divorces

October 8, 2014

A significant part of my litigation practice over the last 30 years involved disputes among shareholders of closely-held businesses.  These disputes are emotional, expensive, and time-consuming.  There is a good reason they are referred to as “Business Divorces”.

 

Typically, they will last 4 to 6 years and cost $200 to $500 thousand dollars in attorney fees, accounting fees, and costs.  Unfortunately, in most states the courts do not have the authority to impose what is most necessary – a forced buyout.  This means the shareholders, already in the throes of a dysfunctional relationship, remain bound to one another. 

 

The dispute takes a serious toll on the business itself.  These disputes always involve successful businesses – no one would fight over a failing enterprise.  By draining the capital, energies, and attention of the small business owners away from the business, these disputes often end up seriously weakening the business indirectly as well.

 

Mediation is well-suited to “Business Divorces” and should come very early in the process – preferably before a complaint is filed.  Legal complaints are jarring, declaratory documents and most lay people are not prepared for the apparent harshness of the language.  The pleadings themselves can serve to drive deeper wedges between the parties.

 

An early mediation also stands a better chance of repairing and restoring the relationship – by identifying mis- or poor communications leading to misperception of motive and intent, bad feelings, and poor working relationships, and by providing a mechanism for the flow of information.  

 

The litigation system is not equipped or designed to address the underlying causes of disputes among owners, nor can it satisfy the emotional undercurrents that are invariably intertwined with the business disputes in a closely-held company – particularly with family-owned businesses. 

 

The Mediation structure, particularly when invoked early in the development of the dispute, is specifically designed to identify and address the needs and interests of the parties.  Whereas, in court, the law is virtually unconcerned with those core elements of the dispute, giving precedence to the legal positioning and wrangling of the very expensive hired guns.

 

Mediation has yet another advantage over court proceedings – the flexibility and creativity available in formulating the resolution.  Courts are strictly limited in the types of remedies they may fashion.  I’ve already mentioned how most of the cannot do what might make the most sense – compel the buyout of one party.  Courts can award damages to a party and, in select instances, issue injunctions to compel or prevent certain actions.  And, that’s about it -- almost every civil litigation will seek some variant of those two remedies.

 

But in Mediation there is no limit on the nature or number of the possible resolutions, allowing the parties to craft solutions that fit their respective needs and interests.

 

Significantly, inherent in that statement is that the parties themselves control the outcome – they mutually determine the result that suits all of the parties.  Litigation is the classic zero-sum game – someone wins, and usually not everything they hoped to win, and someone loses.  Most of the time, no one is happy with the result; and in every case the result is crafted by someone who is a stranger to the parties, with little or no knowledge of the parties’ interests or needs, and with even less care for those interests and needs.

 

Mediation of disputes among the owners of a closely-held business is less expensive, faster, and more satisfying than litigation.  And it provides a flexibility which offers the only real opportunity to restore the relationship, or at least prevent the relationship and the business from suffering further deterioration as a result of the disagreements among the owners.

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