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Empowering a Principal Operator to Resolve a Shareholders’ Dispute Through a Leveraged Buyout of a $25 Million Business

Attorneys Involved: Neal A. Jacobs, Matthew A. Cole, Samuel M. First, Christopher D. Wagner

Our client, the principal operator of a successful $25 million company on the East Coast, was in a mutually unhappy relationship with the company’s other three shareholders, who were based on the West Coast. Communication between the partners had failed. Unable to agree even on basic operational matters such as compensation, the four shareholders were unable to discuss increasingly crucial questions surrounding the future growth of the company and the need to adapt its traditional business model to an evolving industry.

As Jacobs Law Group’s shareholder relations lawyers investigated the backgrounds of all the shareholders, reviewed the underlying corporate documents, and audited the company’s financial records, a few key truths emerged.

First, it became evident that the shareholders effectively had agreed to ignore their disputes -- and any resulting growth of the company – as long as the company’s existing operations remained sufficiently profitable. Second, the shareholder agreements and other documents that established the company could provide the principal operator with leverage to wield against his erstwhile partners. Lastly, the financial audit revealed questionable actions by two of the three West Coast shareholders.

Equipped with this strategic information, Jacobs Law Group’s commercial lawyers helped the client develop a plan to frustrate the obstructionist behavior of the other shareholders without exposing the client to unnecessary risk or claims. By threatening or initiating litigation, Jacobs Law Group ramped up pressure against the other parties gradually, carefully avoiding any disruption to the business operations.

That pressure eventually led to negotiations for a purchase or sale of the company. The efforts of Jacobs Law Group successfully positioned our client to conduct a leveraged buyout of the other partners on favorable terms. The client repaid all required financing within two years, expanded the business, brought new products to market, and now enjoys a level of success that would not have been possible within the previous ownership structure.

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Jacobs Law Group Founder and Managing Attorney Neal A. Jacobs presented "Parasitic Partners" to the Business Divorce subcommittee of the American Bar Association during the Business and Corporate Law Section meeting in Washington, D.C. on Nov. 17. Read more...

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