Andrew Abramowitz

Business Divorces

Although the majority of the transactions I advise on can be described as additive – one company acquiring another one, a company selling newly-issued stock to a new investor – I do spend some time on subtractive (is that a word?) matters, including business divorces. In its simplest form, this term refers to a decision of two business partners to wind down a business, often because some tension has developed in the relationship, just like a personal divorce.

As a purely transactional lawyer, I would only get involved in a business divorce if the parties want to resolve it amicably, without bringing a claim in court, though it can be useful to get the parties moving toward a solution to raise the specter of litigation and its associated costs and delay. In the world of family law, there are attorneys who specialize in collaborative or cooperative divorces, and I try to play a similar role in business divorces by encouraging compromise, even though I’m clearly representing one side and looking out for that party’s interests. Any effort to achieve total victory in these situations is likely a fool’s errand, or at least a very stressful and expensive errand.

In some business divorce cases, the company’s operating agreement or other governing document sets forth an exit procedure that the parties follow. For example, a 50/50 agreement may have a so-called “shotgun” buyout provision that allows one party to initiate a buyout process by setting a value for the company, and then the other party has the option to either buy the initiating partner’s interest or sell to the initiating partner, in either case at the price set forth in the initiating partner’s notice.

If the parties are not following a particular pre-determined procedure, just mutually agreeing to wind down the business, then the parties likely need to draft a dissolution agreement, or similarly-titled document, that details the steps the parties need to take in the wind down. Especially in high-tension situations, the parties will want to exchange mutual releases of claims based on past events, though they would retain the ability to sue based on future actions to be taken under the new agreement, and a mutual non-disparagement clause, so the parties can move on in their respective professional lives without worry about their reputation being sullied by the ex-partner.

The SEC’s SPAC Proposal and Projections

The SEC has issued its long-expected proposed rules regarding SPACs. Here are the proposing rule release and the shorter press release. The SEC has always been skeptical of SPACs, and the rules are generally designed to impose new disclosure requirements on SPACs that make the rules more aligned with those applicable to traditional IPOs. One of the reasons SPACs had their moment in the sun recently is that they are easier to complete than IPOs, so the rules, if enacted, could have the effect of severely dampening the market for SPACs, even if they do nothing to directly restrict them from being done. In fact, the general expectation that rules like these were coming down the pike has, anecdotally, been a factor in the SPAC market slowing down recently.

One of the key areas in the proposed rules relates to projections. Under current rules, companies merging with a SPAC can include projections about the company’s future expected results and can benefit from a safe harbor protecting it from litigation if the projections don’t come to pass, as long as the projections are accompanied by a disclaimer and the companies don’t have actual knowledge that they won’t come true. In contrast, companies going public the traditional way don’t have the benefit of this safe harbor. The proposed rules would eliminate the safe harbor in the SPAC context, which would have the practical effect of precluding most projections from being presented.

The London Stock Exchange’s Proposal for Private Company Trading

The Wall Street Journal reported exclusively on plans by the London Stock Exchange to create a special market for the shares of private companies for limited public trading. The plan itself is not yet public, so the Journal was only able to report on limited aspects of what is contemplated. In the same way that U.S. private companies have increasingly been able to access public-like markets with new exemptions like Regulation CF, Rule 506(c) and Regulation A+ and the development of secondary trading markets for large private companies, this is an effort across the pond to provide some of the benefits of public market access to small and fast-growing companies.