Owners of family-owned corporations often enter into shareholder agreements that spell out whether and to whom corporate shares can be transferred. Frequently, these agreements provide for rights of first refusal by the other stockholders or a stock repurchase by the company if a shareholder wishes to transfer shares during his or her lifetime.  These agreements also typically address whether shares may be transferred to any heirs upon a shareholder’s death.  Unless the language regarding permitted transfers is clear, claims may arise between generations of owners concerning the proper ownership of shares upon a shareholder’s death.

A recent California Court of Appeal decision – Saccani v. Saccani – is illustrative of the type of dispute that can arise between family members over a deceased owner’s shares.  Albert Saccani started Saccani Distributing Company in 1933.  According to the Court, Albert’s “desire was that the company would always be kept in the family.”  When he died, each of his sons – Donald, Roland, and Gary – received one-third of the company’s shares. Continue Reading Definitions in Shareholder Agreements Matter When Transferring Family-Owned Business Stock

Family-owned businesses that are organized as limited liability companies typically reflect the terms of the company’s governance, along with the members’ financial rights and obligations, in a written operating agreement. The terms of the operating agreement often specifically include what, if any, payments a member is entitled to if he or she withdraws as a member of the LLC before the LLC dissolves.  For example, the operating agreement may limit the right to payment of a withdrawing member to the return of any balance in his or her capital account.  An operating agreement may even provide that a member is entitled to no payment whatsoever upon withdrawal.  In any case, agreed-upon provisions concerning payments upon withdrawal will reflect the members’ expectations from the outset.  Such provisions can also protect the LLC from having to make large and unplanned payments upon a member’s unilateral decision to withdraw at a point in time when the LLC may not have the funds to pay such a withdrawal distribution.

Continue Reading Will Your Family-Owned LLC Be Required to Pay the Fair Value of a Withdrawing Member’s Interest?

Family members often transfer family-business ownership interests or other assets between each other. Their discussions sometimes progress from informal negotiations to a written term sheet to a final written agreement.  However, a term sheet itself can be found to be a binding agreement if the terms are sufficiently definite for a court to determine each party’s obligations and if the parties’ conduct evidences their agreement to perform according to those terms.

In Kunz v. Kunz, a Court of Appeals in Iowa recently ruled upon a claim by one family member against another to enforce a “Settlement Memorandum” which provided for the purchase and sale of stock in the family business, even though the Memorandum contemplated the drafting of later documents to finalize the transaction.  In 1973, brothers Richard and Robert Kunz formed Happy Homes, Inc., a company that sold factory-built homes.  Richard died in 2007 and his 50% interest in the company was transferred to his wife, Connie.  Connie and Robert then began discussing the sale of Richard’s interests and later participated in mediation to aid in these discussions.

Continue Reading Do You Have an Enforceable Contract for the Sale of Family-Owned Business Interests or Just an Agreement to Agree?

A family business’ significant commercial relationships are usually reflected in written agreements.  But who is authorized to sign those agreements and to bind the company to the terms?  Typically, a company’s management will have actual authority to sign agreements.  However, the company may give the impression to third parties that other employees (for example, purchasing agents, account managers and IT personnel) that those employees have “apparent” authority to sign contracts relating to their areas of responsibility and thus bind the company to agreements.  It is therefore important for family business owners and management to clearly instruct their employees and agents – and to communicate to third parties – as to whether those employees or agents are authorized to sign contracts and other important documents on the company’s behalf.

Continue Reading Who is Authorized to Bind Your Family Business to Contracts?

When family business disputes erupt, the parties often end up in court, where a judge or a jury will decide their fates.  Litigation of these cases often takes years.  In Massachusetts Superior Court, for example, the rules provide for a presumptive 22 month schedule before judgment in a so-called “fast track” case, while an “average” track case has a 36 month time-frame before judgment.  Federal courts or other states’ trial courts may have slightly faster deadlines to judgment, but the fact is that litigation in court can be a long, drawn-out exercise.  This extended time-frame not only delays the resolution of the dispute, but also can interfere with the ongoing operation of the business during the suit, as management and employees divert their attention to discovery requests, motion practice, and trial preparation over an extended period.  Not to mention the strain such a lengthy process puts on already contentious family relationships.

Continue Reading Should You Arbitrate Your Family Business Disputes?