Ownership Transfers

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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 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?

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

Shares in family-owned businesses are often transferred between family members, whether through a sale or gift during a shareholder’s lifetime or through inheritance after an owner’s death. The parties to such a transfer should make sure it is properly documented to reflect the intention to transfer the shares. Typically, this is done through the transferor’s delivery of a signed share transfer instrument and the company’s issuance of a share certificate in the new holder’s name. In the absence of proper documentation, the transferee may not have a valid claim to the share ownership. Even worse, the company may find itself in the middle of an ownership dispute if the transferee has attempted to acquire the shares through fraud or deceit.
Continue Reading Corporate Formalities Matter in the Transfer of Shares of Family-Owned Businesses

Owners of closely-held businesses, including family-owned companies, often agree to restrict the owners’ ability to later transfer their ownership interests to third parties.  Such restrictions prevent one owner from selling his or her interest to a “stranger” with whom the remaining owners otherwise would not want to co-own or operate their business.  These provisions also frequently require advance consent of the remaining owners before a sale to a third party or provide a right of first refusal through which the remaining owners may match the price offered for a departing owner’s interests before he or she sells to a third party.  Transfer restriction clauses also sometimes provide exceptions for transfers to certain family members, such as an owner’s spouse or children, in order to provide continuity of ownership at least among the owners’ families.  But what happens when a non-transferring owner does not want to do business with his departing co-owner’s children and refuses to acknowledge a transfer of ownership to them?  A state appellate court in Illinois recently addressed such a situation in Kenny v. Fulton Associates, LLC.
Continue Reading Do You Need to Do Business with Your Co-Owner’s Children? It Depends on the Language of Your Agreements.