Divorce, Business Style

A business partnership gone sour is like a bad marriage. Partners squabble instead of tending to business. Some cheat or hide assets. Some have been known to take out credit cards in the other’s name, plant listening devices and charge Sweet 16 parties, boats and vacations to company expense accounts.

And if they can’t work things out, Nicholas San Filippo will help them get a divorce.

While the concept of business divorce is not new, the firm’s business divorce group was formed shortly after the roiling economic cauldron of 2008, when profits melted for many companies.

“When business is good, the shortcomings of a partner are easy to overlook,” says San Filippo, who, with partner Steven Fuerst, leads the business divorce group at Lowenstein Sandler in Roseland. “But when there’s less money coming in, there is much more scrutiny regarding an individual’s performance.”

The only designated practice of its kind in New Jersey at the time grew quickly, as accounting firms and wealth managers referred clients. 

“Nick understands where the end zone is, and that is very attractive to businesspeople,” says William Maderer, managing member of Saiber LLC, a full-service firm in Florham Park. “He explains issues to clients in a way that quickly gets to the bottom line.”

San Filippo begins by showing clients the big picture.

To that end, he crafts a game plan early on, “before there’s a string of nasty emails.” The strategy includes establishing a record of any actions that hurt the company made by the business partner who’s being divorced.

“The law does not provide a remedy unless there’s a bad actor. So if someone’s not performing well, as opposed to a thief, you can always get rid of the thief; it’s tough to get rid of the lazy guy,” San Filippo says. “If you can’t delineate the fact that he actually is a bad guy, not just lazy, not just stupid, then that’s where this becomes more of an art than a science.”

There’s also the fact that personal relationships are involved. “Operating agreements tend to be oversimplified,” he says. “They don’t deal with such issues as having a partner who isn’t working as hard as you are. … You are dealing with a psychological element as well: ‘Who was the favorite kid? Who got the bigger Tonka truck?’”

In one father-son business squabble, the father dropped off Christmas presents for the grandchildren at the son’s house. “Before the car could get out of the driveway, a two-by-four went through the back window,” San Filippo says.

In another case, in which a father fired his son-in-law from the family business, a significant portion of the father’s payout settlement with the son-in-law was recovered through employment practices liability insurance because the settlement resolved a wrongful termination claim.

“The important thing there is we identified the possibility that insurance proceeds might be available early on in the case,” San Filippo says. “We noticed and we followed through—we structured the settlement in a matter that would maximize that insurance recovery.”

One prosperous family business was owned by a parent and that parent’s three children, with the parent having a 55 percent share and each sibling getting 15 percent. But only one sibling was running the business. The three others were no-show employees.

When the no-show relatives wanted to sell the business, San Filippo’s client would have received only a 15-percent slice of the pie, too little compensation for his work, as he had primarily built the business. The lawyer’s solution was to negotiate for a five-year, noncompete agreement for his client, in addition to his share.

Deals also might include confidentiality clauses regarding trade secrets and non-disparagement agreements in which the parting partners promise not to bad-mouth one another.

Still, there are cases that are so fraught with emotion that partners can’t reach accord at the table. About 25 percent of business divorces wind up in court.

“The only time unreasonable people listen is when they are staring up at a judge,” San Filippo says.

Even when partners split amicably, you need an expert in your corner, says Ben Zaitz, a lifelong entrepreneur and patriarch of B. Zaitz & Sons, a family company founded in 1892. He already was a Lowenstein client when he turned to the business divorce practice to handle a professional breakup. Since then, he has turned to San Filippo for representation in two other cases, including a transaction with a Fortune 400 company.

“Business has gotten more complicated, not less complicated,” Zaitz says. “These are complex deals that required someone who can handle tax issues, monetary issues, post-closing issues.”

After a split, San Filippo often helps a client with new, stronger operating agreements that will help avoid another painful business divorce.

“The ultimate success is when the client calls back two or three years later and says revenue is up, profits are up and the weight is off his shoulders,” he says.