This article examines a pioneering example of the successful application of the alternative dispute resolution process known as Collaborative Law (“CL”) to solve a business dispute involving the break up and restructuring of a closely held business. While CL already has gained a solid foothold in the US, Canada and elsewhere in the field of family law, this case represents one of the first examples in the U.S. of CL outside the divorce context.
CL involves a process whereby each party to the dispute, and their attorneys, voluntarily enter into an enforceable agreement to initially attempt to settle the conflict without litigation and without a third party neutral such as a mediator or arbitrator. This CL agreement provides for: a series of settlement meetings with all parties present, actively engaged and promising to take a reasoned, interest-based civil approach; informal and open discovery of relevant facts and documents; a confidentiality agreement with respect to matters disclosed during the CL process; and retention of all independent experts jointly. Finally, the CL agreement permits any party to the dispute to give notice during the CL proceedings to terminate the CL process in order to commence litigation or for other reasons, but then all attorneys and experts to the CL undertaking, and their firms, are required to withdraw from future representation in the dispute. Of course, parties are free to modify the CL process to meet their specific needs. Taken together, the CL agreement results in a paradigm shift with the disputants (and their lawyers) sharing an active interest in problem solving and efficiently finding common ground. According to one of the corporate directors/ shareholders, “CL allowed us a kinder, gentler and cost-effective way to restructure our company.”
This case involved the break up and restructure of a Massachusetts corporation by the four original and equal shareholders who also constituted all of the directors, officers and key employees. The profitable business in question had grown over five years and provided computer and software consulting services to the life science industry. No shareholder agreement existed at the time that three of the shareholders informed the fourth shareholder that a restructuring (buy out) needed to take place due to “irreconcilable differences” that did not in any way reflect questions concerning the fourth shareholder’s technical competence. It was a painful and difficult revelation for the fourth shareholder to hear and the other shareholders to state. The corporation’s Treasurer notes, “We had heard horror stories about companies that almost went bankrupt on lawyers’ fees while restructuring a business partnership. We wanted to prevent that from happening to us. We decided to give CL a shot, although it sounded too good to be true. “
Utilizing this innovative form of alternative dispute resolution, the parties came to an agreement in four months, in approximately twenty percent of the time and legal costs than if the dispute had gone to litigation. The final settlement resulted in: a new corporation being spun off for the departing shareholder/officer; compensation to the departing shareholder for his stock on equitable terms based on a jointly commissioned valuation but in a manner that did not cripple the other shareholders; a constructive and equitable process of mutually determining and agreeing on which customers would go with the newly created company; mutually beneficial non-competition covenants; a software re-seller agreement covering a difficult-to-value software product; a positive, jointly issued statement to the public; and maintenance of working relationships among the principals for future business joint ventures.
One of the corporation’s founders concluded: “Our experience with CL was a very pleasant surprise; I would recommend it as a first step to dispute resolution. It worked for us because we were committed to the CL process. Our attorneys acted as facilitators to keep the process moving and to iron out the differences among the parties. The process was almost painless, even with a few bumps along the away. In the end, all of us walked away from the process feeling like everyone was treated fairly and all parties were satisfied with the outcome. CL also preserved the company’s capital, so we could build two strong companies from the one we all started.”
R. Paul Faxon, Esq. of The New Law Center in Cambridge, MA concentrates his practice in the areas of business and real estate transactions and Collaborative Law. He can be reached at [email protected]
Michael Zeytoonian, Esq. of Hutchings, Barsamian, Mandelcorn & Zeytoonian, LLP in Wellesley Hills and Westborough, MA concentrates his practice in the areas of employment and business law, mediation and Collaborative Law. He can be reached at [email protected]