In Part I of our four-part series on business divorces, we discussed the importance of knowing your options in a business divorce: understanding that the actions you take depend on your unique circumstances and understanding that creating the right plan for your "divorce" is vital to securing the best possible outcome for you and your interests.
The second part in our business divorce series will address the opportunity cost of informal and formal discovery.
For a person entertaining a business divorce, discovery often represents at least three things:
- The unnecessary or inadvertent disclosure of proprietary information about your business;
- An unwanted expense; and
- Something that must be completed before you can go to trial.
It's imperative to know, though, that both informal and formal discovery are vital to understanding your individual situation as well as your very best plan for action. Without discovery, you can make legal and financial blunders, not to mention bad business decisions.
What is Discovery?
Generally, discovery is the process of finding out something that was previously unknown. In legal terms, discovery is a pre-trial procedure in which evidence is collected and analyzed. Discovery is important because it creates leverage by providing information to prove one party to the business transaction was more at fault than the other party.
There are two types of discovery: informal discovery and formal discovery. Both are equally necessary for a business divorce.
Informal Discovery Vs. Formal Discovery
Informal Discovery
- Begins when an attorney begins to learn about the intricacies of his or her new client's business.
- Takes place before and during the trial or negotiations.
- Does not need to follow a specific set of rules, procedures, or techniques.
- Involves information including a company's financial statements, key employees, and valuation.
- Determines the best course of legal action moving forward as well as the possible impacts those actions will have on the business.
- Often includes talking to key stakeholders, such as the business owner and key employees.
Formal Discovery
- Begins after a lawsuit has been filed.
- Takes place before the trial begins.
- Must follow the applicable rules of civil procedure.
- Involves information including depositions, interrogations, and subpoenas, much of which involves the same information found during informal discovery.
- Determines if some information related to the case is privileged and therefore not subject to disclosure.
- Often includes speaking with the key players in the case as well as experts, such as forensic accountants.
Why is Discovery So Expensive?
Many clients balk at the cost of discovery if they are not familiar with the scope or the process of the investigation. Practically, discovery takes a significant number of billable hours as your attorneys learn about your company, collect large volumes of information, and then analyze that information.
The expense of discovery is also tied to the costs of experts because experts are often needed to help interpret complicated financial data and present it in a manner that can be understood by a judge or a jury. Of course, the cost of discovery can save you money and heartache in the long run: it can make your case stronger, help you avoid future litigation, and ensure you are making the best business decisions possible.
Three Components of a Successful Discovery
If you are entertaining a business divorce, how should you and your attorney approach informal and formal discovery? Here are three ways:
First, the lawyer and the client must engage in an ongoing evaluation of the strengths, weaknesses, opportunities, and threats of ongoing litigation because of the uncertain expense of discovery, the abundance of information that must be reviewed during discovery, and the possibility of publicly disclosing proprietary information through discovery.
Second, the party entertaining a business divorce must appreciate the sanctity of the attorney-client privilege and, in doing so, disclose all information about the business to his or her lawyer, even if the information is adverse to his or her position.
Third, the lawyer and the client must agree on a best-case and a worst-case scenario in pursuing a business divorce to its legal conclusion (i.e., a trial verdict). Agreeing to a floor and ceiling of expectations for the business divorce helps define the scope and outline the purpose of the discovery process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
