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. Most disputes that reach litigation involve a failure of the contractual mechanism.
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. Under Ritchie v. Rupe and Sneed v. Webre, the principal post-2014 vehicle for minority owners. Closely-held-corporation procedural advantages under TBOC § 21.563 (corporations) and § 101.463 (LLCs), no demand requirement, direct recovery if justice requires, attorney's fees for substantial corporate benefit, make derivative actions a meaningful tool even where the dispute is fundamentally an exit dispute.
Judicial winding up under § 11.314 (LLCs and partnerships) or § 11.404 (corporations). The statutory route to ending the business relationship by judicial decree. § 11.314 is the more accessible remedy. 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. Requires either contractual authority (shotgun, drag-along) or unanimous consent.
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
Most Texas business divorces ultimately reduce to a valuation question. Texas law does not prescribe a single methodology. Where the company agreement specifies a method, that method controls. Where silent, common methods include discounted cash flow, capitalization of earnings, comparable transactions, asset-based valuation, with marketability and minority-interest discounts.
Texas business divorce practice is heavily front-loaded, what happens at formation governs what happens at the exit. The single most important investment a Texas closely-held business owner can make to avoid expensive business-divorce litigation is careful drafting of the company agreement, shareholders' agreement, or partnership agreement at formation. 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