Controlling shareholders and managers of family-owned businesses often direct the use of company funds and other resources to provide employment and other benefits to non-shareholder family members. In a business that is wholly-owned by close family members, there may be little concern that other family member shareholders will complain about the use of such resources, as long as there is disclosure and perceived fairness concerning the use of company funds and access to employment opportunities. The risk of a potential claim for breach of fiduciary duty or minority shareholder oppression may increase, however, when non-family members are admitted into the ownership structure. At that point, historic and perhaps informal practices concerning family member involvement in, and benefits from, the company may not be acceptable to a new owner. The controlling family member owners must therefore be careful to follow good corporate governance practices when making decisions on the company’s behalf. Continue Reading Watch Out For Minority Shareholder Oppression Claims After Admitting Non-Family Shareholders To The Family-Owned Business
Disputes between and among owners of family-owned businesses are sometimes unavoidable. When such disputes progress to litigation, they can be extremely costly, time-consuming, and disruptive for the business and its owners. However, most civil lawsuits still settle before reaching a trial before a judge or jury. More specifically, many of those suits settle through mediation. Indeed, judges routinely encourage parties to attempt to settle their disputes, through mediation or otherwise, before setting a trial date.
Mediation is a process through which parties to a dispute select a neutral third-party – often a retired judge or an attorney with subject-matter experience – to attempt to broker a deal between the opposing sides. Mediation sessions are confidential and provide an opportunity for parties to explore a variety of options for resolving their dispute that otherwise may become unavailable once the case is put in a judge or jury’s hands. If done early in the life of a case, mediation can also allow the parties to avoid substantial litigation costs and business disruption.
All employers should maintain an employee handbook or similar policy statement that clearly sets out the employer’s position on drug and alcohol use. While federal laws relating to marijuana possession and use have not changed, many states have revised their statutes to legalize, decriminalize, or otherwise permit marijuana possession and use. This has caused some confusion for employers, who must balance the conflicting state and federal rules.
Over thirty states have enacted legislation allowing marijuana use in certain situations. In some states (California and Massachusetts, for example), medical and recreational use is permitted. In many other states, such as Connecticut and Rhode Island, only medical use is permitted. A number of states have also adopted legislation that specifically protects marijuana users from termination from employment based solely on a positive test for marijuana. Continue Reading High Time for Massachusetts Employers to Consider a Marijuana Use Policy
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
Corporate shareholders often expect to receive dividends in connection with their ownership of corporate shares. This is particularly true when owners invest capital in or provide other services to the company in exchange for their ownership interests. But do shareholders’ rights to or expectations of dividends change when shares are acquired through gift or inheritance? This issue frequently arises in family-owned businesses where shares are transferred from one generation of owners, who may have built the business through their investment of capital and labor, to the next generation, who themselves may never have worked in, or invested in, the business.
In Jones v. McDonald Farms, Inc., a Court of Appeals in Nebraska recently was presented with a claim by Diane Jones against her two brothers, seeking a decree of judicial dissolution of the company based on the brothers’ alleged “corporate oppression” through their failure to pay dividends to Diane in proportion to her share ownership. Charles and Betty McDonald had incorporated McDonald Farms, Inc. in 1976. Their two sons, Donald and Randall, began farming with Charles in the mid-1970s and they became officers of the company in 1989, while continuing to perform all farming duties. From 1976 through 2010, Charles and Betty were majority shareholders and Donald and Randall were minority shareholders. In 2010, Betty died and her shares were devised equally to her four children, including Donald, Randall, Diane and another sister, Rosemary. In 2012, Charles gifted his stock equally to Donald and Randall. Charles died in 2014. As a result of these transfers, Donald and Randall each held 42.875% of the company’s stock, while Diane and Rosemary each owned 7.125% of the 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.
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.
In a recent decision, the Massachusetts Supreme Judicial Court ruled that directors of a corporation owe a fiduciary duty to the corporation itself, and not to the stockholders of the corporation (as is the case in Delaware, among other states). In Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci, SJC-12137 (Mass. Mar. 6, 2017), the Court ruled that the directors of EMC Corporation did not breach their fiduciary duties to the corporation when they approved the sale of EMC as a whole, versus selling off the constituent operations individually, which might have brought a higher price. The Court relied on the plain language of M.G.L ch. 156D, Section 8.30, which provides that a director shall discharge his duties “in a manner the director reasonably believes to be in the best interests of the corporation.”
Family-owned businesses often employ multiple family members. Even if there is an expectation that employment will continue indefinitely, the company and the family member employees both usually reserve the right, explicitly or implicitly, to terminate the employment “at-will,” meaning at any time and for any reason. The terms of such at-will employment need not be set out in writing, though sometimes they are. However, where the parties contemplate the right and obligation of lifetime employment, they should put the employment terms in writing to avoid the potential application of the statute of frauds.
The statute of frauds, generally, bars a party from bringing a claim for breach of an agreement that cannot by its terms be performed within one year, unless the agreement is in writing. In some states, such as Massachusetts, an otherwise enforceable oral agreement for lifetime employment does not fail due to the statute of frauds, because, the courts reason, the agreement could theoretically be fully performed if the employee dies or the company goes out of business within one year of the contract date. In other states, such as Illinois, an oral lifetime employment agreement is not enforceable under the statute of frauds, because, as the courts reason, a lifetime employment agreement “anticipates a relationship of a long duration – certainly longer than one year.” Courts in those states apply the statute of frauds to such agreements in recognition of the evidentiary concern that memories can and do fade over time and thus become unreliable and in order to protect defendants and the court from “confusion, uncertainty and outright fraud.” Continue Reading If You Expect to Work in the Family-Owned Business for Life, Be Sure to Get It in Writing
All too often, family businesses are run in an “informal” fashion, with insufficient attention being paid to corporate formalities, including requirements set forth in a corporation’s bylaws. The Delaware Chancery Court recently ruled in Rainbow Mountain, Inc. vs. Begeman (March 23, 2017), that even in a family-owned business where all of the parties to a dispute are family members, the bylaws will control corporate actions.
In Rainbow Mountain, the defendant Terry Begeman was a member of the family that had founded the corporation. After a falling out among the family members, the group that held a controlling interest sought to remove Terry from the board of directors of the corporation, and in 2008 voted him off of the board of directors. Terry refused to accept this removal, and in 2014 the corporation filed an action for declaratory judgment seeking to confirm that Terry had been removed from the board.