Family-owned business shareholders often enter into buy-sell agreements that provide the terms on which an owner can or must sell his or her shares. Such agreements usually restrict an owner’s ability to sell shares to third parties without first offering them to the company or other shareholders. Rights of offer are also often specifically triggered upon a shareholder’s death. Finally, these agreements typically spell out the timing and source of the payment by the purchasing company or shareholder.
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Family Owned Business
Does Your Family-Owned Business’s Lease Reflect An Appropriate Rental Value?
Family-owned enterprises often place real estate assets and operating businesses into separate entities, with the real estate company leasing space to the operating company. In such instances, the owners or managers need to agree upon what rent the operating business will pay to the real estate company. The rental amount will then affect the funds available for use or distribution at each company level. Without agreement on the proper amount of rent, or without equal ownership and involvement at each company level, disputes can arise as to the fairness of the rent that is charged or paid.
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Personal Goodwill: A Tax Saving Opportunity
Very often, tax consequences determine how successful the sale of a business ultimately is. Owners often focus only on top line price, while structure and tax treatment can make a significant impact on how much of the purchase price the owner ultimately retains. Asset sales, while attractive to buyers because they allow for a “step up” in the basis of the assets up to the amount of the purchase price (enabling the buyer to take increased depreciation and amortization deductions), often create problems for owners. Because the seller in an asset sale is typically an entity, the sale proceeds have to pass into the entity and then out to the owners. This makes the sale proceeds subject to a double tax where the seller is a C corporation, an S corporation with earnings and profits, or an S corporation subject to the built in gains tax. In addition, certain state taxes, such as the Massachusetts “Sting Tax” may apply, further decreasing the net sale proceeds to the owners.
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Federal Government Contract Modifications: Pay Attention!
Many family-owned enterprises do business with the Federal government, either as a contractor or a supplier. A recent case decided in the Court of Federal Claims serves as a stark reminder that any time a contract with the Federal government is amended or modified, the parties must pay particular attention to any release language contained in the amendment, or they run the risk of releasing potential claims that are unrelated to the modification.
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When Terminating Officers in the Family-Owned Business, Follow the By-Laws
A Minnesota Appeals Court recently ruled that a father could not terminate his son as the president of the family-owned business because the father did not have authority to do so under the company’s by-laws. Call v. Call, No. A19-0074 (Minn. Ct. App. Sept. 3, 2019). This case involved a dispute between the owners of a manufacturing company, Winco, Inc., that had been in existence since 1927. Ralph Call had been Winco’s sole shareholder for decades. In 2009, Ralph’s son Daniel joined the company with the understanding that Daniel “would eventually own a significant share of Winco.” By 2017, Daniel owned 65% of Winco’s shares as a result of a series of transfers from Ralph. Winco’s board of directors also had appointed Daniel president of the company in 2014, while Ralph remained its CEO.
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Should Your Family-Owned Business Include a Forum Selection Clause in its Agreements?
A forum selection clause is often included in an agreement in order to specify where any later dispute regarding the agreement must be litigated. In a recent decision, a federal magistrate judge in Ohio denied a defendant’s motion to transfer the venue of a lawsuit from Ohio to California based, in part, on the existence of a forum selection clause identifying Ohio as the venue for any dispute. See Down-Lite International, Inc. v. Chad Altbaier, No. 1:19cv627, United States District Court, S.D. Ohio, Western Division (August 6, 2019).
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Can the Division of Family-Owned Business Interests Held in Trusts or Estates be Submitted to Arbitration?
Parties to probate court proceedings involving family-owned business interests held in trusts or estates can agree to arbitrate their disputes instead of proceeding through the court system. Such agreements could be broadly drafted to include “all disputes” arising from or relating to a decedent’s trusts or estate. Or they could be narrowly focused to address only limited issues that may arise in the course of trust or estate administration, for example, disputes over the valuation of business interests. In all events, parties should carefully identify and agree upon the scope of the disputes they are agreeing to arbitrate before beginning the arbitration process. In In re Estate of Richard T. Gordon (Case No. 339296, November 8, 2018), the Court of Appeals of Michigan recently reviewed an award in which the arbitrator divided certain family-owned business interests that previously were held by trusts or estates. One family member challenged the award on the grounds that it exceeded the scope of the parties’ arbitration agreement.
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Is it Defamation to Call a Co-Owner of the Family Business a Thief?
Disputes sometimes arise between owners of family-owned businesses. And sometimes those owners say unflattering or insulting things about one another to other family members. When one family member claims that another owes him or her money in connection with the business, he or she may even use language like “steal,” “thief” and “robbed” in comments about the other owner. When that happens, can the target of the statements sue for defamation? In Nguyen v. Vu, Civil Action No. 18-CV-01132, a United States District Court in Colorado recently dealt with such a claim and decided that the statements were not defamatory, particularly where the statements were made in the context of the family business dispute and were not made in the presence of any non-family members.
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Can Your Transfer of Family-Owned Business Stock or Assets be Avoided as a Fraudulent Transfer?
Parents frequently transfer their ownership interests in a family-owned business to their children. This is usually done in connection with an owner’s estate planning or as part of an orderly succession of the business’ management. But what happens if an owner transfers his or her business interests in order to place the business assets or interests out of the reach of that owner’s creditors? In that case, the transfer may be avoided as a fraudulent transfer.
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Watch Out For Claims Of Economic Duress After Purchasing Shares In A Family-Owned Business
Owners of family-owned businesses sometimes enter into agreements between each other for the purchase and sale of shares in the business. Ideally, these agreements are negotiated, documented and implemented in a way that each party is satisfied with the result – e.g., one owner acquires additional shares while the other owner receives the agreed-to cash value for the shares and exits the business. But sometimes one party (often the seller) will claim that the deal was not fair, that he or she did not in fact receive the full value of the shares or that the agreement should be voided due to “economic duress.”
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