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Business Litigation Alert: "To Protect Yourself from a Business Divorce - Agree to a Prenup"

When a business breaks up, it can often be very similar to the dissolution of a marriage.

One prime example of this is the case of TransPerfect Global, Inc. (TransPerfect), a very successful language translation company started by two college roommates over twenty years ago. See a recent New York Times article here. Despite the tremendous success of the company (estimated to be worth over $1 billion with approximately 3,500 employees), the relationship between the business owners (one-time fiancés) deteriorated to the point that they ended up in litigation.

A Delaware court has now ordered the sale of TransPerfect due to the extremely dysfunctional relationship between the two founders. As a result, the two owners have lost their company and the employees who have not already left the company are either considering doing so or worried whether they will have a job after the new buyer takes over.

The business partners could have avoided the fighting, litigation, and turmoil with an agreement upfront detailing what happens to the company if the owners can no longer work together. This example offers simple lessons for any business partners looking to form a new venture.

  1. Seek Legal Counsel on Both Sides. When starting any new company with one or more partners, it is very important to consult with experienced legal counsel in order to protect your interests from the beginning and to make sure the business entity’s formation and organizational documents and agreements are adequate and appropriate.
  2. Consider Many Situations. When formulating such documents, you must look at a variety of situations. What is the best course of action if a partner simply decides they no longer want to be a part of the organization, if they want to take the company in a different direction, if partners can no longer agree, etc. Planning for these conceivable situations will help you to be prepared in a variety of scenarios.
  3. Remember Your Employees. The employees often suffer when a business divorce occurs as it is a time of considerable uncertainty. Based on the NYT article, that appears to be the case with regard to TransPerfect. If one of the agreed upon remedies in the entities' organizational agreement is to sell the company to an outside, third-party, consider including provisions to protect the employees and ensure job security.

The case of TransPerfect showcases just how important it is to have an agreement in place outlining how decisions will be made if partners decide they must part ways. When this basic step is omitted, the resulting conflict and upheaval hurts everyone involved.

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