\u201cMake it easy on yourself\u201d, the hit single by the Walker brothers, not only resonates with love struck couples, it rings true for family owned businesses, because \u201cbreaking up is hard to do.\u201d\u00a0 Just ask the Berkowitz and Demoulas families. They kept lawyers busy for several years while their clients had nightmares.<\/p>\n
Even a well drafted shareholders\u2019 agreement for orderly transition of management may not necessarily avoid litigation, but it can be of immeasurable value both to the wrongfully terminated family member, and to the majority who want to squeeze out recalcitrant shareholder. Absence of a shareholders\u2019 agreement often beckons litigation.<\/p>\n
States, including Massachusetts, treat closely held corporations like partnerships.\u00a0 Shareholders owe one another a fiduciary duty of utmost good faith and loyalty, the standard that partners owe each other.\u00a0 The Donahue<\/em> line of cases recognizes that majority shareholders in a closely held corporation have an opportunity to oppress, disadvantage, or \u201cfreeze out\u201d minority shareholders.\u00a0 One freeze out tool is to terminate a shareholder\u2019s employment.\u00a0 But if less drastic remedies are available and not tried first, such as a warning, counseling, or a reasonable opportunity to correct behavior, the terminated shareholder may sue both the company and the majority shareholders for breach of their fiduciary duty. \u00a0Courts recognize that employment is the only real source of economic return for a shareholder\u2019s investment in a closely held company.\u00a0 Termination of employment, therefore, is often the weapon of choice used by the majority which can have drastic financial consequences for the terminated shareholder. \u00a0A well drafted shareholders\u2019 agreement may head off litigation by clearly delineating responsibilities, providing due process, and a code of behavior which allows for termination for cause.\u00a0 Termination of a minority shareholder without cause is likely to precipitate long and costly litigation.<\/p>\n A properly crafted shareholders\u2019 agreement treats the consequences of the death, disability, share transfers, and mid-life crises of the principal owners. \u00a0It should also consider involvement or lack of involvement of the founders\u2019 children, alternative dispute resolution (i.e. mediation\/arbitration), clearly defined lines of responsibility of the principals, how shares should be valued in the future, and other factors unique to the particular family.<\/p>\n Litigation should be a last resort to resolve disputes. \u00a0In addition to a shareholders\u2019 agreement, business owners can make it easier on themselves by listening (and then listening some more) to other family members both inside and outside the family business. Open communication to disseminate and share ideas and information among family members in the business helps to avoid the creation of silos. Silos impede the sharing of information; isolate family members from each other; create suspicion; foster paranoia; and provide launching pads to \u201cattack\u201d when conflict arises.\u00a0 The result can be MAD (Mutually Assured Destruction) through an unwanted sale, merger, dissolution or bankruptcy with all the rancor and angst that accompany them.<\/p>\n \u201cMake it easy on yourself\u201d and engage a lawyer sensitive to family issues and who knows the value of proper legal documentation for closely held entities. She should also believe that litigation is not the answer, but rather a consequence of a family\u2019s unfortunate dysfunction that could be avoided with more open communication and appropriate legal and organizational structures to motivate communication and avoid silos.<\/p>\n If litigation is the only remaining course, be sure to engage a capable trial lawyer experienced in family disputes, because \u201cbreaking up is so very hard to do.\u201d<\/p>\n