When management fails, businesses suffer. Clients seeking to avoid management failure often ask who has the legal authority to manage a business? What can the managers and officers of the business properly do? What limits on management exist? How do the owners control management decisions?
Lewis Provides Experienced Guidance in Solving Small Business Management Disputes
Common Business Management Disputes Include:
- The extent to which ownership of the business may be cut-off from day-to-day operations of the business.
- What happens when management refuses cooperation with some owners?
- Who does the lawyer for the business represent, and who is entitled to that advice?
- The extent that management must maintain accurate business records.
- Who has the right to information about the business, its transactions and its finances through discussion or review of business records?
- Who has the right to participate in management decision-making for the business?
- Is there a right to insist on a plan for managing the business and insistence on conformity to the plan?
- Who has right to create liabilities by contract such as loans or long-term contracts?
- Who has the right to direct the day-to-day operations of the business, and what happens when there is a disagreement?
- Who has the right to spend and utilize the assets of the business?
- Who has the right to decide who will work in the business and how they will be compensated?
- Are there any rights to veto substantial and extraordinary decisions of the business?
- Can some or all of the owners authorize or direct actions which management must undertake?
- May the managers act to benefit themselves personally to the detriment of the business, other managers, and the owners?
- Changes in the governing documents that are being requested by some stakeholder.
- How may management deadlock and dysfunction can be resolved?
- What is the remedy when a manager of the business has taken an opportunity individually that could have been exploited by the business?
No list of disputes will ever be complete since the possibilities and permutations are essentially endless.
Hurdles in Business Management Disputes Resolution
In the routine case of a business dispute over a claimed delivery of late, defective, and out-of-specification goods or services, it’s easy enough to see how that dispute will work out. Its likely some money will be exchanged, and the parties will each decide not to trust the other party again, terminating the relationship.
Contrast that dispute to the routine management dispute involving an ongoing small business providing daily employment, with divided ownership having entirely different visions for the future prospects.
Compound that with a long history of day-to-day interaction and recurring displays of ego, antagonism, avarice and perhaps family love with no party able to afford to buy the other side out or having a superior choice to provide income for their families.
It may be that much like the supplier dispute, the internal dispute in a small business can be resolved with the simple exchange of a negotiated amount of money, perhaps financed, and a parting of the ways. The typical small business dispute is not likely to involve characters of the dispassionate emotional detachment of a logic-driven Mr. Spock. They are, instead, real people, with real or perceived “issues” and a history of interaction. To the parties breaking up a business may feel more like a real divorce than an economic transaction. The logic of solving the dispute with an exchange of money without deciding a winner or loser sounds good to Spock. The question is whether it will sound good to the real parties. Or will it be necessary to review, discuss, litigate, and prove history to reach a settlement? Must the resolution deliver only a satisfactory economic resolution or must it also deliver an emotional satisfaction.
Lewis has helped many clients surmount the hurdles of dispute resolution in small businesses.
Playbook for Resolving Business Management Disputes
Identify the client. When a new client approaches any lawyer to resolve a dispute involving conflicts within a business, the first thing that the lawyer and the client must do is to decide who the lawyer represents, and avoid putting the lawyer in untenable conflicts of interest. This will likely be documented in an immediate writing of some type, such as an engagement letter.
Often, the client needs education on the professional ethical requirements imposed by law on the lawyer, such as duties of undivided loyalty, confidentiality and the avoidance of the representation of conflicting interest. The client needs to understand how these lawyer ethical requirements may play out over time, particularly since alliances may shift.
A lawyer and client relationship is formed by agreement. This agreement should clearly identify the client, and perhaps the non-clients. A number of possibilities exist:
- New client may be an owner of the business, such as partner, corporate stockholder or LLC member, seeking advice individually as owner.
- New client may be part of a group of some or all of the owners, such as partners, corporate stockholders or LLC members, with the proposed new client to be those within the particular group.
- Person may be an employee, officer or director of a business seeking advice, not for his personal benefit, but for the benefit of the business, in which case the business will be the new client.
- Person may be an employee of an insurance company, seeking to retain counsel for an insured, in which case the client will be the insured.
- Person may be another lawyer seeking to retain counsel for a client, in which case the client and both lawyers may represent the client jointly.
Why client Identification is important. The identity of a lawyer’s client will determine a number of other issues such as:
- Engaging a lawyer. Who has the right to engage and disengage the lawyer? For example, can a stockholder engage a lawyer for the corporation?
- Keeping the lawyer a secret. Who is entitled to know that the lawyer has been retained? For example, can a CEO retain a lawyer and keep it secret from other stakeholders?
- Attorney-client privilege. Who is entitled to know what information was disclosed to the lawyer and what advice the lawyer gave? Can someone else just go straight to the lawyer? Who can waive the attorney-client privileged?
- Paying the lawyer. Who is paying for the lawyer? Does management pay a lawyer with the funds of the business to give management advice contrary to the owner’s interest?
- Calling the shots. Who has the right to direct the lawyer to act or not act? Who sets the litigating strategy of the business? Who establishes the objectives of the representation?
- Loyalty to whom. As a matter of professional responsibility imposed by law, lawyers generally cannot represent conflicting interests, with some well-known exceptions.
- Adverse to whom. Against whom may the lawyer be adverse in the current matter? May the lawyer be adverse to everybody else or just some of the others?
Lawyer provides advice based upon factual investigation and legal knowledge leading to establishment of objectives of the representation.
To decide disputes over the management of the corporation, lawyers will rely on Alabama Business Corporation Act, Alabama Code, §10-2B-1.01, et seq. and judge-made Alabama law as interpreted by appellate judicial decisions and supplemented by common law or judge-made law. To apply that law, the following documents will likely be needed and perhaps more:
- Articles of Incorporation including Articles of Amendment as well as Restated Articles of Incorporation, and articles correcting any of these documents.
- Any other documents filed with the Judge of Probate.
- Initial Bylaws adopted by either the Board of Directors or shareholders if so reserved in the Articles of Incorporation plus any earlier Bylaws for older actions, which are not required to be filed publicly.
- Merger and exchange documents filed either with the Judge of Probate or the Alabama Secretary of State.
- Amendments to Bylaws.
- Minutes of shareholder meetings.
- Minutes of Board of Directors meetings.
- Shareholder agreements and any voting trusts or voting agreements.
The Business Corporation Act provides for the inspection of records (and copy) by shareholders for a limited set of documents provided written notice of a demand for inspection is given at least five business days before the date of a proposed inspection. In expanded rights to inspect and copy are provided by statute to shareholders of record for 180 days preceding the demand for inspection or who is a holder of record of 5% of the outstanding shares.
An officer or agent who refuses without a reasonable cause a proper request for inspection may be liable to the requesting shareholder for a penalty not to exceed 10% of the value of the shares owned by the shareholder plus any other damages or remedies provided by law.
Often an initial step is to make demand for preservation and inspection of the records of the business.