## Business divorce in California **"Business divorce"** = the breakup of a closely-held business — partnership, LLC, or close corporation — where co-owners can no longer work together. Business divorces are some of the most contentious commercial litigation, often with personal relationships, life savings, and family dynamics intertwined. ## Common triggers - **Disagreement on direction** (growth vs harvesting, sell vs hold) - **One partner not pulling weight** - **Money / accounting disputes** - **Personal conflict** (spouses fighting, family rifts) - **Death / disability** of co-owner - **Divorce** (marital divorce affecting business interest) - **Buyout / exit demands** - **Suspected wrongdoing** (theft, self-dealing, breach of fiduciary) - **Deadlock** (50/50 split with no tiebreaker) - **Major life event** (retirement, illness) ## Operating agreement / partnership agreement / shareholder agreement controls **If well-drafted, the agreement specifies:** - Buyout triggers + valuation method - Right of first refusal - Dispute resolution (mediation, arbitration) - Voting / governance rules - Non-compete / non-solicit on exit - Buy-sell mechanisms - Death / disability / divorce provisions **If poorly drafted or absent:** - Default state law applies - ${s.name} LLC Act / Partnership Act / Business Corp Law - Court has more discretion - More expensive litigation **Most business divorces stem from BAD or NO agreement.** ## Fiduciary duties — important grounds **In closely-held businesses:** - **Duty of loyalty** — not to compete, not to take corporate opportunity - **Duty of care** — exercise reasonable diligence - **Duty of good faith** — fair dealing - **Duty to disclose** — material information **Heightened in some states ("Donahue v. Rodd Electrotype" / Massachusetts approach):** - Strict good-faith + loyalty among shareholders - Like partners in a partnership - Higher bar than public companies **Common fiduciary breach claims:** - Self-dealing transactions - Excessive compensation - Diverting opportunities to other entities - Squeezing out minority owner - Failure to distribute profits - Information withholding - Improper expense allocation - Unauthorized transactions ## Minority oppression / freeze-out **Common pattern:** - Majority owners control board / management - Cease distributions to minority - Pay themselves above-market salaries - Deny minority access to information - Force minority to sell at lowball price - Squeeze out via mergers / restructurings **Remedies for minority oppression:** - Books-and-records demand - Direct + derivative lawsuits - Buy-out at fair value - Judicial dissolution - Damages for past misconduct ## Buyout / valuation methods **Common valuation approaches:** **1. Operating agreement formula:** - Specified method (book value, multiple of earnings, etc.) - Pre-set discount factors - Buyout terms specified - Followed if reasonable + properly applied **2. Fair market value:** - What willing buyer would pay - Discounted for minority interest - Discounted for lack of marketability - Most common litigation outcome **3. Fair value:** - ${s.name} statutory term in dissenting-shareholder context - Often NO minority discount - Often NO marketability discount - More favorable to selling minority **4. Specified events / triggers:** - Death / disability buyout values - Voluntary withdrawal values - Termination-for-cause values - Different methods for different exit reasons ## Discounts (or absence) **Minority discount (lack of control):** - 15-35% reduction typical - Reflects minority's inability to control - Often disallowed in fair-value buyouts **Marketability discount (lack of marketability):** - 15-35% reduction typical - Reflects difficulty selling private interest - Sometimes disallowed in fair-value buyouts **Tax-affecting:** - S-corp valuation accounting for taxes - Active issue (Tax Court rulings) - Can significantly affect value ## Judicial dissolution **${s.name} statutes typically allow dissolution for:** - Deadlock among directors / shareholders - Fraud / illegality / oppression by controlling owners - Misapplication of company assets - Inability to achieve company purposes - Reasonable not feasible to continue **Effect of dissolution:** - Liquidate assets - Pay creditors - Distribute remaining to owners - BUT often leads to forced sale (less than ongoing-concern value) **Buyout as alternative:** - Many states allow buyout in lieu of dissolution - Statutory "buyout for dissolution" right - ${s.name} may have specific provision ## Direct vs derivative claims **Direct claims:** - Owner sues in own name - Personal harm separate from entity harm - Examples: oppression, breach of agreement, retaliation **Derivative claims:** - Owner sues on behalf of entity - Recovery goes to entity (then prorated to owners) - Examples: theft, self-dealing, waste - Requires demand or futility - Procedural requirements ## Information access — "books and records" **${s.name} typically allows shareholders / members to:** - Inspect financial statements - Inspect operating documents - Inspect minutes - Member / shareholder lists - Tax returns (in some states) **Refusal to provide = often fiduciary breach + statutory violation.** ## ADR options **Mediation:** - Voluntary - Often required by agreement - Helps preserve relationships (sometimes) - Cheaper than litigation **Arbitration:** - Often required by agreement - Faster than court - Less expensive - Limited appeal - Confidential **Litigation:** - Public record - Expensive - Slow (years often) - Sometimes only option - Court-supervised remedies available ## Strategic considerations **Before filing:** - Document everything - Preserve evidence - Don't transact with company until counsel - Continue normal duties (don't quit / withhold work) - Get expert valuation early **During dispute:** - Continue documenting - Don't poison company with public dispute - Consider business impact - Watch for retaliation - Use leverage strategically **Settlement levers:** - Information (both ways) - Operational disruption - Personal pressure - Tax considerations - Business momentum - Litigation costs ## Tax implications **Critical — sale vs redemption:** - Cross-purchase between owners - Entity redemption of shares - Different tax consequences - Different effects on remaining owners - Plan with tax counsel ## Common mistakes - **Going to lawyer too late** — early counsel is cheaper - **Burning bridges** — sometimes future cooperation needed - **Threatening too early** — preserve options - **Self-help** — don't take what you can't keep - **Public disputes** — bad for business - **Underestimating opponent** — even friend will fight - **Not getting valuation early** — needed for any discussion - **Ignoring tax** — net matters more than gross ## What you should do If you're facing business divorce in California: hire experienced commercial-litigation counsel + valuation expert ASAP. California business attorneys with closely-held experience are ideal — different from M&A or general corporate. Most charge hourly; budget for substantial fees ($25K-$500K+ depending on complexity). Mediation often saves money + relationships. --- *This guide is general information about California law as of mid-2026 and is not legal advice. Business divorce is highly fact-specific. Talk to a licensed California business attorney about your specific situation.*