In the world of business, there is a certain kind of “knot in the stomach” that only a partnership or business owner dispute can produce. At Halling & Cayo, S.C., we often see this tension peak when one owner is ready to leave, but the remaining owners aren’t ready to let them or aren’t ready to pay the price demanded.
A buy-sell agreement is often described as a “business prenuptial.” It is the governing document that dictates how an owner’s interest in a company will be reassigned if they die, retire, become disabled, or simply want out. But a document is only as good as its enforcement. In Wisconsin, where “business divorces” can become as emotionally charged and legally complex as any domestic litigation, understanding the mechanics of enforcement – and the chaos of its absence – is critical for any small to medium-sized business owner.
The Power of the “Triggering Event”
Enforcement begins with a “triggering event.” Most well-drafted Wisconsin buy-sell agreements identify specific scenarios that set the buyout process in motion:
- Death or Disability: If a member or shareholder dies or becomes subject to long term disability, many agreements trigger a buyout obligation.
- Retirement or Resignation: This is often varied based on what the members or shareholders agreed to, sometimes there is an age requirement, or it matters whether the resignation was voluntary or for cause.
- Divorce: This is rarer, but sometimes agreements require some kind of change after a divorce to avoid entanglements from Wisconsin’s community property laws.
- Bankruptcy: Typically a filing of a bankruptcy can trigger the option or obligation for the Company or other members/shareholders to purchase the filing party’s interests.
- The “Deadlock”: When 50/50 partners can no longer agree on the color of the lobby, let alone the direction of the firm there are often provisions that set out the buyout procedure.
When one of these events occurs, the agreement’s enforcement mechanisms “spring” into action. If the agreement is clear, the transition is can be relatively straight forward, though often it is nuanced as to whether it has been triggered or not. A bigger issue is if the triggering event or the effect of the triggering event is vague, it can become a matter for litigation.
How to Enforce a Buy-Sell Agreement in Wisconsin
If the company, member, or shareholder refuses to honor the terms of a signed agreement – perhaps they believe the valuation is too low or they simply want to “hold the business hostage” – the remaining owners may be forced to take decisive legal action.
- Specific Performance
In Wisconsin, money damages are often insufficient in business disputes because ownership in a closely held company is considered a unique asset. Therefore, the primary tool for enforcement is Specific Performance. We petition the court to order the breaching partner to physically transfer their shares or membership units in exchange for the price dictated by the agreement.
- Declaratory Judgment
If there is a dispute over whether a “triggering event” has occurred (for example, whether a partner is “permanently disabled” under the contract’s definition), we may file for a Declaratory Judgment under Wis. Stat. § 806.04. This asks the court to officially interpret the contract and declare the rights and obligations of all parties before the situation escalates into a full-blown breach.
- The Role of Forensic Valuation
Enforcement often stalls at the “price tag.” Many agreements use a formula (e.g., 3x EBITDA) or require a third-party appraisal. The issues can be interpreting exactly how to apply the formula or sometimes there are fights about getting access to the records necessary to do the valuation.
What Happens if You Don’t Have an Agreement?
If you are operating a multi-owner business in Milwaukee, Waukesha, or anywhere in Wisconsin without a buy-sell agreement, there can be less clarity about what happens in one of these situations. Without an agreement, Wisconsin statutory law and common law control.
Disputes over these events in closely held companies without a buy-sell either have to come to an agreement, or seek Judicial intervention.
Judicial Dissolution: The “Nuclear Option”
When partners in a deadlocked business cannot agree on a buyout and have no agreement to guide them, their only recourse may be Judicial Dissolution under Wis. Stat. § 180.1430 (for corporations) or § 183.0701 (for LLCs).
This is the “nuclear option.” You are asking a judge to shut the company down, sell the assets at a fire sale, and distribute the remaining cash. It is a tragic end for a successful business, usually resulting in pennies on the dollar for the owners and the total loss of the company’s “goodwill” and brand value.
Breach of Fiduciary Duty Litigation
Without an agreement, disputes often devolve into claims of Breach of Fiduciary Duty or other obligations of the members/shareholders. In Wisconsin, shareholders in a corporation and LLC members generally owe each other a duty of loyalty and care. If one partner tries to freeze another out—denying them distributions or access to information—this can give rise to a cause of action that can result in damages or even dissociation of the breaching member.
Experienced Counsel for your “Business Divorce”
At Halling & Cayo, S.C., we pride ourselves on being trial lawyers, not just “litigators.” We know how the inside of a courtroom looks, and can navigate these disputes. [/vc_column_text][/vc_column][/vc_row]
Sean M. Sweeney is a shareholder at Halling & Cayo S.C. His practice focuses on business litigation, offering transparent pricing for business litigation, and recovering investors losses as a result of stock broker fraud on contingent fees. Sean represents investors in FINRA Arbitrations and companies in Wisconsin, all over the United States, as well as internationally with clients in Canada, Germany, and Australia.
Email Sean: sms@hallingcayo.com
Call Sean: 414-755-5020 (Direct Line)