Business Divorce
The negotiated, mediated, or litigated separation of co-owners of a closely-held Texas business, covering contractual, statutory, fiduciary, and judicial mechanisms by which co-owners exit a relationship that has become untenable.
"Business divorce" is the practitioners' term for the negotiated, mediated, or litigated separation of co-owners of a closely-held Texas business. It is not codified in the TBOC; it is a descriptive term covering the range of mechanisms, contractual, statutory, fiduciary, and judicial, through which co-owners exit a relationship that has become untenable.
Five structural approaches
Negotiated buy-out under a pre-existing contractual mechanism. The cleanest path. A well-drafted buy-sell agreement or redemption provision in the company agreement, shareholders' agreement, or partnership agreement provides the framework.
Negotiated buy-out without a pre-existing mechanism. Where the agreement is silent, parties may still negotiate an exit. Mediation is often more economical than the alternatives below.
Derivative breach-of-fiduciary-duty action. Ritchie v. Rupe declined to recognize a common-law shareholder oppression claim and pointed minority owners to derivative suits for breach of duties owed to the company. Sneed v. Webre holds that the business judgment rule still applies to the merits of those claims. In a closely held corporation or LLC, § 21.563 and § 101.463 remove the standing and demand requirements for claims against insiders and, if justice requires, allow the court to treat the suit as direct and pay the recovery to the plaintiff. Under § 21.561 and § 101.461, a court may order the company to pay the plaintiff's expenses, including attorney's fees, if the suit results in a substantial benefit to the company.
Judicial winding up under § 11.314 (LLCs and partnerships) or receivership under §§ 11.404, 11.405 (corporations). Section 11.314 lets a court order an LLC or partnership wound up if its economic purpose is likely to be unreasonably frustrated, another owner's conduct makes it not reasonably practicable to carry on with that owner, or the business cannot reasonably be carried on under its governing documents. Section 11.314 does not apply to corporations. A shareholder may seek a rehabilitative receiver under § 11.404 only if all other available remedies are inadequate, and liquidation under § 11.405 is available only in narrow circumstances. See Judicial Dissolution.
Sale of the entire business. Where neither party can or will buy out the other, selling to a third party and dividing proceeds may be the only resolution. Absent a drag-along or similar contract right, a sale of all or substantially all of the assets needs the owner approval the code or governing documents require, by default two-thirds of the outstanding voting shares of a corporation (§ 21.457) or a majority of all members of an LLC (§ 101.356(c)).
Common triggers
Squeeze-out or freeze-out tactics by controlling owners; death, disability, divorce, or retirement of a key owner without adequate buy-sell provisions; strategic disagreements; personal conflicts; discovery of fiduciary breaches or self-dealing.
Valuation issues
Texas law does not prescribe a single methodology. Where the governing agreement specifies a method, that method generally governs. Where silent, common methods include discounted cash flow, capitalization of earnings, comparable transactions, and asset-based valuation. Whether marketability and minority-interest discounts apply depends on the governing agreement and the facts.
When the company agreement, shareholders' agreement or partnership agreement contains exit terms, those terms frame the separation. Where the foundational documents are silent, business divorces become substantially more expensive, more uncertain, and more dependent on the post-Ritchie derivative-action mechanism.
Companion article: Business Divorces in Texas