An Indiana Court of Appeals recently ruled upon a dispute between a mother and her daughter and son-in-law (and their business) concerning the lease of commercial property and the repayment of loans the mother made on the business’ behalf. The Court began its decision in Wayt v. Maschino (December 29, 2017), by noting: “This case can be added to an unfortunately long list of cautionary tales concerning the perils of going into business with family members.” Continue Reading Court Ruling Highlights The “Perils Of Going Into Business With Family Members”
As 2018 looks to be a favorable M&A environment, many business owners may come to the conclusion that it is time to sell the family business. While it is true that some businesses sell as a result of an offer that comes “out of the blue,” the reality is that most sales occur as a result of a well-designed process intended to maximize value for the seller. Sellers should consider allocating considerable time preparing for a sale, sometimes as much as a year. A well-run sale process can take considerable time as well. The time is well-spent though, as thorough preparation and an organized sale process typically lead to higher valuations and quality buyers. Continue Reading Thinking of Selling? Start Early, Build Your Team
After a somewhat choppy 2017, many experts are calling for a busy 2018 in the M&A space. The Intralinks Deal Flow Predictor Report suggests that the pace of M&A activity will increase in 2018, based in large part on “a combination of gradual acceleration in global economic growth, low inflation in advanced and emerging economies, buoyant asset markets and low-interest rates that continue to bolster the M&A markets.” While there are concerns that could impact the potential increase in deal flow (such as a rise in economic protectionism or a global equity sell-off) the prevailing view is that the positive conditions for M&A activity will continue to rule the day and drive increasing dealmaking. Continue Reading Expect A Busy 2018 On The M&A Front
In connection with the purchase of a family-owned business, the buyer may seek a non-compete agreement from the selling owners and certain family member employees. Such agreements are intended to protect the buyer from a seller’s competition with the business post-sale and from diversion of the customer relationships and goodwill that typically are part of the purchased assets. Courts will generally enforce a non-compete agreement negotiated as part of a business sale as long as it is reasonable in geographic scope and duration. What is reasonable will depend on factors such as the type of business being purchased, the pre-sale geographic reach of the business, and the consideration paid for the restriction on the seller’s future competition. Parties to a non-compete should therefore carefully consider these factors when drafting the agreement. The parties also should carefully define what type of “competitive” conduct will be restricted. Continue Reading Is A Non-Compete Agreement In Connection With The Purchase And Sale Of A Family-Owned Business Enforceable?
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.