A business dispute is a business dispute, at least until it becomes an intra-family dispute. As owners of family-owned businesses know, a business dispute between owners or shareholders can spill over into family relationships. Conversely, the breakdown of family relationships can precipitate disputes on the business side.
For advisors to family-owned businesses – lawyers, accountants, business consultants, etc. – the emotional overlay to what may otherwise be a garden-variety business dispute within a privately-owned company presents unique challenges requiring advisors to analyze the issues from both a professional standpoint and a human perspective. While it is important for advisors to be empathetic, it is critical that they provide their clients with objective, reasoned legal and business advice and judgment, unclouded by the emotions that are bound to arise where business partners are also family members.
The legal framework for assessing, litigating, and resolving disputes within a family-owned business is the same as that applied to a dispute between shareholders in any closely held business. Among other things, shareholders in any closely held business, including a family-owned business, owe each other a duty of “utmost good faith and loyalty.”
When a dispute between shareholders in a family-owned business arises, the need to avoid further damaging the relationship between shareholders, who also happen to be family members, is particularly critical given a recent line of cases regarding the remedy available in such situations. The long and short of these recent cases is that shareholders may not be able to force a “business divorce.” Instead, they will have to learn how to live together within the family business because a court’s ability to order the majority to buy back the shares of the minority is limited. Rather, a remedy will be crafted that comports with the shareholder’s reasonable expectations and which puts the shareholder in the same place she would have been but for the majority’s breach of fiduciary duty.
While always an important dispute resolution technique, mediation is often particularly well suited to resolving disputes involving family-owned businesses, particularly in light of these recent cases. The advantages of mediation include:
- Mediation often can be faster and less expensive than litigation.
- Mediation can be more flexible, in terms of the process and also the remedy that can be crafted by the parties with the help of the mediator.
- Meditation can potentially provide a “win-win” resolution.
- The flexibility of mediation allows professionals other than lawyers (e.g., a psychologist who can help address some of the underlying family issues) to be brought into the process.
Notwithstanding the benefits of mediation, the better course for a family-owned business is to adopt strategies to avoid disputes escalating to the point where mediation and/or litigation become necessary. Recommendations for family-owned businesses include:
- Planning: The current generation of ownership needs to engage in estate planning and succession planning. Consideration should be given to engaging the next generation (i.e., the contemplated successors) in that planning process.
- Dealing with Conflict: Conflict avoidance – a common shortcoming of both families and businesses – is potentially even more destructive in the context of a family-owned business. The failure to address family conflicts can spill over into the business realm, just as the failure to address business conflicts can negatively impact family relations. Recognizing, addressing quickly and resolving conflict is critical for family-owned businesses. Indeed, the failure to plan often is the result of a conflict avoidance strategy.
- Communication: Keeping the lines of communication open between generations, within generations, and including spouses in such communications is another important strategy for family-owned businesses to adopt. Family members need to be made to feel that they are part of the process. There needs to be an understanding of what the different visions and goals for the business are. That is, there needs to be buy in and consensus among family members. Toward that end, those family members who actively participate in and control the operation of the business should not ask less active family members blindly to follow their instructions. By the same token, less active family members should not unquestioningly accede to the controlling family members’ demands (e.g., signing documents without reading and understanding them).
- Mentoring: The current generation of ownership needs to be willing to invest in mentoring the next generation of leaders so that the business can be passed on, assuming that is the goal.
- Professionalism: While family-owned, a family-owned business is nonetheless a business and needs to be run as such. A family-owned business needs to create, maintain and observe corporate formalities and structures (e.g., governing documents, job descriptions, accountability, clear lines of authority, etc.) just as any company should.
Advisors to family-owned businesses can play a critical role in equipping their clients with the tools and structures that can help avoid the business and its transition to future generations from being derailed by intra-family disputes. Advising such businesses, however, presents its own set of challenges, which often include:
- Identifying who the client is.
- Appreciating that while there is a business problem to be resolved, additional dynamics are at work that are not ordinarily present in a “business” case.
- Developing an intimate understanding of the family relationships and dynamics at work, without becoming entangled in them.
- Developing solutions that make sense legally and from a business perspective, but which also maintain, or at least seek to minimize the damage to, family relationships.
Family-owned businesses have long been a critical part of and driving force behind the nation’s economy. In these challenging economic times, it is even more vital that family-owned businesses adopt strategies that can help avoid the risk that intra-family disputes pose to their current and future success.
Emily C. Shanahan is an attorney with Tarlow, Breed, Hart & Rodgers, P.C., a Boston law firm, and concentrates her practice on business litigation.