By Emily C. Shanahan, Esq.
A business dispute is a business dispute, at least until
it becomes an intra-family dispute. As owners of family-owned
businesses know, a business dispute between owners or shareholders can
spill over into family relationships. Conversely, the breakdown of
family relationships can precipitate disputes on the business side.
For advisors to family-owned businesses – lawyers,
accountants, business consultants, etc. – the emotional overlay to what
may otherwise be a garden-variety business dispute within a
privately-owned company presents unique challenges requiring advisors
to analyze the issues from both a professional standpoint and a human
perspective. While it is important for advisors to be empathetic, it is
critical that they provide their clients with objective, reasoned
legal and business advice and judgment, unclouded by the emotions that
are bound to arise where business partners are also family members.
The legal framework for assessing, litigating, and
resolving disputes within a family-owned business is the same as that
applied to a dispute between shareholders in any closely held business.
Among other things, shareholders in any closely held business,
including a family-owned business, owe each other a duty of “utmost
good faith and loyalty.”
When a dispute between shareholders in a family-owned
business arises, the need to avoid further damaging the relationship
between shareholders, who also happen to be family members, is
particularly critical given a recent line of cases regarding the remedy
available in such situations. The long and short of these recent cases
is that shareholders may not be able to force a “business divorce.”
Instead, they will have to learn how to live together within the family
business because a court’s ability to order the majority to buy back
the shares of the minority is limited. Rather, a remedy will be crafted
that comports with the shareholder’s reasonable expectations and which
puts the shareholder in the same place she would have been but for the
majority’s breach of fiduciary duty.
While always an important dispute resolution technique,
mediation is often particularly well suited to resolving disputes
involving family-owned businesses, particularly in light of these
recent cases. The advantages of mediation include:
- Mediation often can be faster and less expensive than litigation.
- Mediation can be more flexible, in terms of the process and
also the remedy that can be crafted by the parties with the help of the
- Meditation can potentially provide a “win-win” resolution.
- The flexibility of mediation allows professionals other than
lawyers (e.g., a psychologist who can help address some of the
underlying family issues) to be brought into the process.
Notwithstanding the benefits of mediation, the better
course for a family-owned business is to adopt strategies to avoid
disputes escalating to the point where mediation and/or litigation
become necessary. Recommendations for family-owned businesses include:
- Planning: The current generation of ownership needs to engage in
estate planning and succession planning. Consideration should be given
to engaging the next generation (i.e., the contemplated successors) in
that planning process.
- Dealing with Conflict: Conflict avoidance – a common
shortcoming of both families and businesses – is potentially even more
destructive in the context of a family-owned business. The failure to
address family conflicts can spill over into the business realm, just
as the failure to address business conflicts can negatively impact
family relations. Recognizing, addressing quickly and resolving
conflict is critical for family-owned businesses. Indeed, the failure
to plan often is the result of a conflict avoidance strategy.
- Communication: Keeping the lines of communication open
between generations, within generations, and including spouses in such
communications is another important strategy for family-owned
businesses to adopt. Family members need to be made to feel that they
are part of the process. There needs to be an understanding of what the
different visions and goals for the business are. That is, there needs
to be buy in and consensus among family members. Toward that end,
those family members who actively participate in and control the
operation of the business should not ask less active family members
blindly to follow their instructions. By the same token, less active
family members should not unquestioningly accede to the controlling
family members’ demands (e.g., signing documents without reading and
- Mentoring: The current generation of ownership needs to be
willing to invest in mentoring the next generation of leaders so that
the business can be passed on, assuming that is the goal.
- Professionalism: While family-owned, a family-owned business
is nonetheless a business and needs to be run as such. A family-owned
business needs to create, maintain and observe corporate formalities and
structures (e.g., governing documents, job descriptions,
accountability, clear lines of authority, etc.) just as any company
Advisors to family-owned businesses can play a critical
role in equipping their clients with the tools and structures that can
help avoid the business and its transition to future generations from
being derailed by intra-family disputes. Advising such businesses,
however, presents its own set of challenges, which often include:
- Identifying who the client is.
- Appreciating that while there is a business problem to be
resolved, additional dynamics are at work that are not ordinarily
present in a “business” case.
- Developing an intimate understanding of the family relationships and dynamics at work, without becoming entangled in them.
- Developing solutions that make sense legally and from a
business perspective, but which also maintain, or at least seek to
minimize the damage to, family relationships.
Family-owned businesses have long been a critical part
of and driving force behind the nation’s economy. In these challenging
economic times, it is even more vital that family-owned businesses
adopt strategies that can help avoid the risk that intra-family
disputes pose to their current and future success.
Emily C. Shanahan
is an attorney with Tarlow, Breed, Hart & Rodgers, P.C., a Boston
law firm, and concentrates her practice on business litigation.
A version of this article appeared in Womens' Business on December 1, 2009. Please click here to view the published article.