The Limitations of Business Agreements in Court

When going into business with someone else, it’s always a good idea to make sure you have all the terms of your agreement in writing in case a dispute arises later on down the road. In most instances, a formal business contract (or even an informal agreement signed by both parties) can prevent a lot of squabbling in court, but even with a tight contract, there’s no guarantee it will be followed to the letter, even if it’s brought before a judge.

Business owners tend to run into this problem when there’s a dispute over who owns (and therefore controls) how much of the company. These disagreements are usually he-said/she-said arguments with little or no evidence supporting either side, leaving judges to try and sort through various claims and accusations. As if that weren’t bad enough, these disputes tend to arise during times of crisis for the business, so the judge is usually forced to make a decision quickly, in which case, they are often urged to prioritize fairness and efficiency over the legal letter of the contract.

Whether you’re currently headed into court with your business partner, or you’re just starting a business with someone and you want to be aware of the potential pitfalls later on down the road, here are some surprises you might face:

Despite all the hours you and your lawyers spent on details like meeting notices for shareholders and/or directors, quorums, waivers, resolutions, etc., a judge might decide to ignore all of them in favor of the “bigger picture”. Judges are usually more concerned with the actions that were taken by the parties that brought them before the court in the first place, and sometimes that focus can work in your favor, while other times it can work against you.

Majority shareholders usually hold the most influence in a company, but if a judge decides the majority shareholders abused their power by squeezing out minority shareholders and/or shareholder-employees, the judge can overrule past decisions made by the majority shareholders and even grant minority shareholders rights to damages. In some extreme cases, judges have even been known to appoint someone to operate the company, and there’s no guarantee you’ll have any say in who the judge will choose to put in control.

Even if you have an agreement laying out the terms and prices for one person to buy out another shareholder or co-owner of the business, a judge might decide they don’t think the pricing formula is fair to both parties, at which point they can set a hearing for both parties to present their case as to why they think company shares should be set at a certain price.

Depending on the state in which you live and do business, your judges might have the legal power to do anything from removing a director or officer and appointing a new one, to dissolving the company entirely.

Judges generally tend to go one of two ways when it comes to operating agreements for limited liability corporations. If they find the agreement to be detailed and tailored to the situation that brought the owners before the court in the first place, judges will usually abide by (and enforce) the terms of the LLC operating agreement. If, on the other hand, the judge finds that the document was not well drafted, or is thin, they can decide to scrap the whole thing and make up their own rules as they go along.

With indisputable convenience for clients, we cover Chicagoland and beyond with offices in Chicago, Elmhurst and Wilmette. Keep in mind that Lubin Austermuehle also assists businesses and business owners who are accused or victims of shareholder oppression.

At Lubin Austermuehle, we focus on relationships and are driven by results. When it comes to unraveling complex business disputes, we are proud of our track record of outright victories in court or substantial and lucrative settlements for our valued clients. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. We serve clients throughout Illinois and the Chicagoland area. You can contact us online here or call us at 630-333-0333.