Insights

Rob Royal featured on the cover story for the November issue of Attorney at Law magazine

December 6, 2017

Divorcing The Business

By Susan Cushing

“I do business divorce.” With a smile nearly as cryptic as his words, Robert A. Royal pauses momentarily, seemingly to allow the full import of his enigmatic introduction to be absorbed.

“Like marital partners, business partners get into disputes and conflicts that they cannot solve,” he continues, “and, I am asked to step in and help resolve these issues from a legal perspective, and divorce them! That’s what usually happens.”

A shareholder with the Phoenix law firm Tiffany & Bosco P.A., Royal’s primary focus involves the orderly and fair distribution of assets when a partnership comes to an end. His self-ascribed moniker as a “business divorce attorney” aptly captures the essence of this.

“These types of disputes have been around forever,” says Royal, “that’s why we have statutes to deal with these issues in different settings. This term ‘business divorce’ just dawned on me because it fits. Business divorce is probably more of a melding between business law and commercial litigation that’s unique in these settings. Generally, what’s known as commercial litigation, covers such areas as: Was there a contract breach? Did you improperly steal my business from me? Are you using proprietary information of mine that you shouldn’t be using? Business divorce combines these kinds of litigation principles with application of corporate laws, fiduciary duties, and application of corporate governance documents.”

Not unlike a marital dissolution, one major sticking point in business divorce is what to do with a departing owner’s interest in the company. That departing owner has invested money, sweat, and maybe committed a large share of his or her life to the company to build its value. Unless the corporate governing documents allow for the payment of that value upon departure, and provide a formula for calculating the value of such buyout, Arizona statutes provide no independent procedure to solve the problem. As a result, the parties create leverage, attempt to negotiate, and if necessary, file litigation utilizing certain statutes if applicable all in an effort to force the buyout.

“Parts of these dispute resolution issues involve Arizona statutory law, primarily in the corporate or LLC arena where the entities are formed, and the laws that govern the entities,” explains Royal. “The case law interprets those kinds of things and then, in the litigation arena we have claims that are associated with laws and businesses in particular, dealing with fiduciary responsibility. This requires giving advice to its directors, officers or managers with respect to the issues that come up.”

According to Royal, these cases generally involve smaller business partnerships or companies owned by just a few people, typically five or less.

“Sometimes they are family,” he says, “which brings in a whole new dynamic. Even if they are not related, they are business partners who put a lot of trust and reliance upon one another to do the right thing and properly work at the business for the benefit of the business. Things start to go bad when people don’t do that. This begins the process of a conflict that cannot be resolved and evolves into some very interesting war stories.”

Leaving Empty Handed

By way of demonstrating how complex and frequently ugly, the demise of a partnership can be, Royal offers this hypothetical example:

“Let’s say you and I are in a partnership and we’ve both put in 10 years of our lives, invested our money and we’ve seen some pretty good success. One day you come to me and say, ‘Rob, as much as I don’t want to, I need to leave this company. My father is retiring, and wants me to take over the family business.’

“I would say, ‘Of course, sure.’

“Now, what do you think is going to happen to your interest in that company that you spent 10 years building and the value of that? Sure, you can quit the business and your salary and give up the profits and distributions on a yearly basis, but what about the value of your stock? Well, Arizona law, both the corporate and LLC company statutes, don’t deal effectively with that situation.

“So, you’re going to say, ‘If the statutes don’t deal with that, let’s take a look at our agreement.’ You pull out the owner’s agreement and search for what happens to your stock when you leave employment. Unfortunately, a lot of the agreements don’t address what happens to an ownership interest upon owner termination of employment. Many good lawyers do not address termination and what happens to the interests.”

According to Royal, a typical agreement will usually say something to the effect of, “If you die, we’ll buy your stock. If you get divorced, we’ll buy you out and here’s the formula. If a creditor comes after you, we’ll buy you out. If you fall into bankruptcy, we’ll buy you out.” That’s because everyone wants to select their business partner, they don’t want the spouse to come in, or the creditor to own interests. But typically, there is no plan for termination. People who find themselves in this situation will hire a lawyer in the hopes they can negotiate a fair value for their interests, but even that is complicated. How do you determine “fair buyout price” when the rationale is that the other owners of the business who own the other restricted ownership interests are really the only persons interested in controlling those shares giving them full value?

As with most things, preventative measures are far superior to dealing with issues than waiting for them to arise. “One of the greatest advancements in the area over the past 15 years, is people’s better understanding of the rights, duties and obligations that can be put into an agreement to prevent a nasty divorce,” says Royal. “I have clients who have been through the socalled, ‘nasty divorce,’ and they’ll tell me, ‘Rob, put together my next company so I don’t have these problems.

Love of Litigation

For the longest time Royal says he had no interest in becoming a lawyer. His father, who was a successful attorney, passed away when Royal was just 16.

“At that time my mother asked me if I might be interested in law school and I said no,” he says. “I think I was just ignorant.”

In his first year of college, he took a couple of classes that sparked his interest in the law, but it was after taking a course called Law in Society, he suddenly was saying, “Maybe I will go into law.” But, he knew even then that the only aspect that he was seriously interested in was litigation.

“I’m very competitive,” says Royal. “I’ve played a lot of sports in my life, and I saw litigation as feeding that desire to compete. I enjoy the thinking and analysis. Every case is different and to add to that, meeting people and helping them solve their issues. I strive for success in all things I do, and when your actions can affect the lives of others that drive becomes more pronounced.

“So, that was it. Two classes in college sent me on the track. I love what I do, it’s very rewarding.”

After 35 years in practice he says that more and more he finds himself fielding inquiries as to when he might retire. But that is something that is still in the far distant future.

“I’m 61,” he says, “so you start getting asked about retirement. But, that’s not something I’m even contemplating at this stage. I mean, there are plenty of lawyers that are 76 practicing law every day and quite expertly. It’s just something I very much enjoy doing. I know I won’t be doing this forever, but for right now I’m enjoying what I do.”

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