In Business, Trust Your Family at Your Own Peril

March 7, 2019 | Evan H. Krinick | Commercial Litigation

Commentary:

Long Island has been my home for most of my life.

Here are a few of my favorite things about my hometown: beautiful beaches, great public education, fried clams, Billy Joel, the lunar module, four Stanley Cups, the Belmont Stakes and Bethpage Black.

Some of my not-so-favorite things: unbearable traffic, exorbitant property taxes and the absence of big-time college football.

As a commercial litigator, the greatest thing about Long Island is the family-owned business. Long Island is full of them. I think there are more family-owned businesses than nail salons. (As an aside, why are there so many nail salons? Do Long Islanders really care that much about their fingernails?)

Why are family-owned businesses good for commercial litigators? Because when families own businesses together, common sense and good judgment go out the window. People assume when it comes to family, a handshake and good will are enough to manage the business. If you are eating together at Thanksgiving, then all must be kosher at the office. Nothing could be farther from the truth. Because, while everyone is eating turkey and watching football, one sibling or cousin or brother-in-law is up to no good.

In the post-World War II generation, family members joined forces to create businesses in a variety of industries, from plumbing supplies to insurance brokers, and everything in between. Through hard work, the business flourished and ultimately the children of the founding family members assumed control. The second generation increased the value of the business and built an even more profitable enterprise. Problems begin when the third generation steps into management and realizes that the success of the business is not guaranteed, and their relationship with their co-owner family members deteriorates.

Accusations as to poor management begin to surface, followed very quickly by more serious claims of outright theft. Cousins refuse to speak to each other, brothers and sisters ignore one another, even parents and children lose all sense of perspective. Everyone in the family takes sides, and attempts by older family members to mediate are rejected.

And then they call the lawyers. The lawyer asks to see the “agreement” (it could be a shareholder’s agreement in a corporation, or a partnership agreement in a partnership or a member agreement in a limited liability company).

There is no agreement.  Why would you need a written agreement among family? You need one to answer the following questions:

Who gets to buy who out of the business? At what price? Who was entitled to make that costly investment? When will the profits be distributed?

Without an agreement, all these issues and many more are food for the rapacious lawyer.

The lawyer now knows that this family dispute is ripe for litigation – long, costly and unpleasant litigation.

The lesson:

A written agreement will prevent many disputes from escalating into litigation. An agreement should address all the issues relating to succession, governance and valuation, among other things. “Handshake deals” may have been the custom a generation (or two) ago, but in 2019, there is no excuse for any business not to have a written agreement outlining the rights and responsibilities of all owners. And that agreement needs to be reviewed and updated on a regular basis to keep it current because things change.

While discussion of these issues may not be easy or comfortable, and are often set aside time and time again in favor of the press of immediate business concerns, such failure will only benefit your attorney’s bank account.

This column was inspired, in part, by the recent decision of Justice Elizabeth Emerson, in Supreme Court, Suffolk County, in a case entitled Application of Marro.

This article appeared in the March 1, 2019, issue of Long Island Business News. ©2019 Long Island Business News.

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