For as long as there has been business, there has been
conflict between owners. While a robust conflict of ideas can lead to
constant improvement, systemic conflict can be destructive to an
Conflict can result from greed, ego, or a need for
control. In some family businesses it can be rooted in historical
family antagonisms. In other cases it arises from a sense of being
under-appreciated, being taken for granted or from bearing
disproportionate burdens. In mild cases, conflict can manifest itself
in quarreling and missed opportunities. In serious cases, it can result
in business failure, soured friendships or family schisms.
Many conflicts can be abated by simple measures such as
opening up the books and sharing information. Others require the
thoughtful use of consultants and management experts who can bring
industry norms to bear on contentious issues such as compensation and
competency. When properly selected, the sense of objectivity and
fairness these professionals can bring to the table is often enough to
set the business on track.
However, when it isn't, many turn to lawyers for help.
Different approaches are required to maximize value in different
circumstances. No two situations are the same and win-win outcomes
aren't always available to eliminate deadlock, to stop self-dealing,
to remove obstacles to growth, or to find a way to realize on an
illiquid ownership interest.
The starting point for a lawyer is to identify the
client's desired goal and tolerance for risk and to then evaluate the
various tools that can be used to that end. These can include reason,
negotiation, mediation, arbitration, and litigation. Sometimes unique
leverage is available and can be exploited. Nevertheless, the key is
to marry the right tool to the right strategy and to exploit them
within the confines of the fiduciary duties which the law imposes on
Fiduciary Duty Obligations
Privately owned business owners owe each other fiduciary
duties. These fiduciary duties require that the owners act with the
"utmost good faith and loyalty" to each other and the Company.
Oppressive measures taken by the majority at the expense of the
minority which have the effect of freezing out the minority are
prohibited. A breach of fiduciary duty may occur by the majority
terminating minority shareholders, taking excessive salaries or
refusing to declare dividends.
Problem: A brother owns 75% and his sister owns 25% of
the family business founded by their now deceased parents. Only the
brother is involved in the business. The sister receives a small
dividend each year. As the business becomes increasingly profitable,
the brother increases his salary driven by a sense of entitlement
because the profits result from his efforts. The sister's eventual
reaction is a request for increased dividends or to be bought out.
Brother buys her shares, but fails to disclose that he is about to
receive an offer to buy the company from a third party for
substantially more per share than he is paying his sister. He then
promptly sells all of his shares to the third party.
Solution: The sister brings a claim against her brother
for breaching his fiduciary duty in failing to disclose the offer from
the third party. The sister realizes additional compensation for her
shares consistent with the company's actual value.
In Massachusetts, minority owners also owe fiduciary
duties to the majority. For example, the minority may not use a veto
right to prevent a company from taking action in the best interests of
Problem: 30% minority shareholder has veto right over
the sale of a technology business at a price less than $10 million.
The Company, running out of money despite receiving over $2 million in
short term loans by the majority owner, must be sold. Minority
shareholder refuses to consent to any sale below $10 million unless he
is paid the amount he'd receive from a $10 million sale.
Solution: Company grants an exclusive license to its
proprietary technology to a third party without the consent of the
minority shareholder. The minority shareholder sues. The majority
shareholder defends on the grounds that there was no "sale" and
counter sues the minority shareholder for breach of fiduciary duty in
unreasonably withholding consent to the sale. Minority shareholder
tries to enjoin the license agreement. The Court denies the
injunction, and the license agreement goes forward.
Firing Business Owners
Where the controlling group fires an officer who is also
a minority shareholder, a claim for breach of fiduciary duty may
arise. When such a termination constitutes a breach of fiduciary duty
is not always clear. In one leading case, the Court held that the
majority breached its fiduciary duties to the minority shareholder
because there was no legitimate business purpose for terminating the
minority shareholder, and the majority disregarded the long-standing
policy that employment in the corporation would go hand in hand with
stock ownership. However, in another case, where there was no general
policy tying stock ownership to a right to employment, an owner
termination was allowed even in the absence of a legitimate business
purpose for the termination.
Problem: One of several founding shareholders of a
company becomes disruptive and unproductive. He blocks strategic
initiatives, undermines his colleagues and alienates most of the
Solution: On advice of counsel, the Board of Directors
compiled a paper trail evidencing a pattern of unsatisfactory
performance, the repeated opportunities extended to the founder to
mend his ways, and then fired the unproductive shareholder. To
minimize the effectiveness of an anticipated charge of wrongful
"freeze out", the Company offered him a generous severance package
which forced him to choose between accepting the severance and giving a
release to the company, or suing the company for freezing him out. He
took the severance.
Ensuring Business Opportunities
The fiduciary duties of directors and shareholders of a
closely held corporation also prohibit the diversion of business
opportunities to the director or shareholder or their affiliated
Problem: Two brothers each own 50% of a business. One
brother dies. The surviving brother controls the business and was
named the executor of the estate of the deceased brother for the
benefit of the deceased brother's children to whom the deceased
brother's shares were left. The surviving brother grows and expands
the business, but all new opportunities are exploited in the name of a
new entity owned exclusively by the surviving brother's side of the
Solution: On learning of the surviving brother's self
dealing, a child of the deceased brother brought suit to recover
damages arising out of wrongful diversion of corporate opportunities.
The Court ordered damages, a transfer of assets to the original
Disputes between business owners risk the value those
owners spent years, and sometimes decades, creating. They also impair
the future growth of that value. While non-litigation solutions are
desirable, all means to effectively resolve the dispute must be
considered. Clients and their advisors, including their lawyers, must
identify the goal and carefully evaluate the risks and rewards of each
potential action available to solve the problem. The desired strategy
varies depending on the unique circumstances of the situation, the
leverage available, the external influences, the situation of the
business owners, the percentage ownership and a multitude of other
factors. Advisors must think creatively to tailor their advice and
their strategies to each situation. The goal, however, is almost
always to preserve or realize on the highest possible value of the