Divorce and  Family-Owned Businesses

Litigation May Be Your Only Option

A family-owned business can be the best way to transfer and protect generational wealth. Family-owned companies tend to succeed when everyone in the family cooperates to run and manage their businesses and assets effectively.

But family members frequently don’t get along.

A recent Businessweek.com article states

  • Second-generation firms make up 40% of family-owned businesses in the United States.
  • 13% are successfully passed down to a third generation.
  • 3% reach the fourth or higher generation.

 

The following is a fictional scenario illustrating the dangers of divorce and a family-run business, complicated by multiple ownership structures and made worse by significant family strife.

Some siblings were responsible for a family-owned company’s dividends to some shareholders but not others. Additionally, the senior family members believe the siblings caused specific actions to be taken by other family-owned enterprises, to the disadvantage of other family members, by failing to account to shareholders and partners. Instead of getting involved in family disputes, an option is to be bought out of the family enterprises. Although that sounds simple, it isn’t because of the following problems:

Different groups of family members own various family companies.

The family business includes corporations, partnerships, and limited liability companies.

As a result, multiple transactions between them impacted the valuation of each family-owned business.

The family members, including the siblings, do not get along.

There are few corporate and accounting records for each family-owned business.

So, where does one even start with such a complicated legal maze?

First, compile all pertinent data about the business’s performance during the previous five years. This might even require taking legal action to uphold the rights of directors and shareholders to see business records.

After reconciling old, unaccounted-for transactions, attorneys might persuade a representative from each faction of the family to participate in a mediation. Mediation should lead to a mutually approved buy-out of the family members’ interests and an agreed-upon valuation of each family enterprise.

However, there are some more options the family could have had to think about if a buy-out couldn’t be worked out:

  • To act impartially on behalf of the owners, each entity should have an independent board not comprised of family members.
  • Attempt to dissolve the family-owned businesses involuntarily.
  • Litigation resulting from commercial divorce may involve claims for negligence, breach of fiduciary duty, and corporate waste against the corporations’ various board members and officers.

Hopefully, despite the difficulty of the family company and the resentment among family members, they will resolve the issue amicably without resorting to legal action. However, if the various family groups aren’t advised by knowledgeable legal counsel and didn’t decide on a neutral third-party mediator to help them resolve the disputes, likely, this wouldn’t be achievable.

Divorce attorneys should be prepared for corporate divorce litigation. They can also offer insightful advice and frequently crucial support to resolve complex issues amicably. But, of course, it is always best, financially and for the future strength of the family, to work things out, out of court. Being prepared for court, however, puts Senior management in a stronger negotiating position.

 

Brandon Legal Group
1209 Lakeside Drive
Brandon FL, 33510
(813) 902-3576