Preventive Legal Medicine for Shareholders of Family-Owned Businesses
“Historians are quick to point out the costliest of all human conflict is civil war because there can be no winners – only losers. A family business war is a lot like that. It's a form of corporate suicide in which family members often destroy the business as well as important relationships.” [Texas Patriarch - "A Legacy Lost" by Douglas Box, Greenleaf Publishers, 2016. Preface].
Starting and running a business in Massachusetts involves more than just finding office space. Entrepreneurs need legal counsel to organize their business entity, setup Bylaws, board of directors, shareholder agreements. Entrepreneurs may need legal opinions relating to a wide array of issues from developing a business plan, to understanding government regulations, licensing, obtaining copyrights and trademarks, to creating employment contracts. Legal counsel can help your business avoid unanticipated problems.
Most Businesses are Created and Operated without a Strategy or Plan to Exit.
Many reflect substantial concentrations of the owner's personal wealth tied up in the business. Owners are single-minded focusing on managing the company on a day-to-day basis. There is a need to have a business plan, a road map that guides the business to a point where the “personal wealth” can be converted, sold or transferred. We help by creating business plans with that goal in as the end result.
Personal Liability for Actions of the Corporation. Your corporation may not protect you personally from a lawsuit. If you do not operate the corporation with reasonable formality, a court could take away your corporate limited liability and hold you personally liable for the corporation's actions or debts. The term is called “piercing the corporate veil”.
What Happens if One of the Shareholders Want to Leave the Business?
It is relatively easy for a few associates and friends to start a business. What happens if a shareholder dies, is injured, becomes seriously ill, wants to retire, or simply wants to sell his or her interest? What happens if your former associate and shareholder dies and his or her spouse keeps the equity shares, remarries and the new husband, Mongo, wants to be on your board of directors? What about your own exit strategy? Do you want to pass the business interest to your children? If so, how do you give or otherwise transfer equity interest to your children? What are the legal and tax issues in succession planning. Is this type of succession planning the right move?
It is easier to start a business enterprise than it is to exit the business without conflict and confusion.
What Should You Do, if your company has more than one shareholder?
- Begin by understanding that shareholder difficulties can come in all forms including retirement, sickness, injury, family problems, divorce, spousal influence, company culture conflicts or simply where a shareholder wants to sell his interest.
- You may have a ‘boiler-plate' corporate Bylaw describing a 30-60-90 day form of buy-sell agreement. This type of agreement can cause more problems than it was intended to resolve. Your shareholder exit plan should not be left to chance. It should be in place to enable a shareholder to liquidate his or her interest.
- Call Durkin Law, set up an appointment. There is no cost to inquire. If you hire Durkin Law to develop your exit strategy and a customized buy-sell agreement, we will do so after you have had an opportunity to discuss the risks and benefits. Call (617)720-0332.
Durkin Law, PC is experienced in business exit strategy from three perspectives.
First, historically, Roger Durkin was a member of the Philadelphia-Baltimore-Washington Stock Exchange and president of Synercap Corporation, a venture capital company. As such, he has helped start many companies, raise capital, take them public and sat on the boards of directors guiding their progress. We see the exit strategy from that of the investment banker's perspective, from the exiting shareholder's viewpoint and from the company's strategic view.
Second, Durkin Valuation Consultants, an affiliate, has been providing business appraisals involving shareholder disputes, divorce, decedent estates and those addressing particularly troubling, misconstrued and poorly written shareholder buy-out agreements. We have seen families torn apart by an inability to develop a smooth exit strategy. We have seen successful companies bruised and battered by the divorce of a shareholder because of a poorly written shareholder buy-sell agreement led to litigation wherein appraiser experts negligently or intentionally misrepresented the value of the business.
Third, we are attorneys who are motivated to help companies prevent potentially destructive shareholder problems by creating a well-drafted corporate buy-sell agreement. We will need to discuss your business, but in the end, you will have a workable buy-sell agreement.
