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Sunday, 17 September 2017 12:50

AVOIDING ‘CIVIL WAR’ Experts weigh in on how family-owned businesses can avoid damaging litigation

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When two former executives of Pitsch Holding Company Inc. filed a lawsuit against three of their siblings in 2007, they probably didn’t know they’d be starting a 10-year war.

What began as a family disagreement about management of the closely held Grand Rapids-based demolition company evolved into a decade of litigation, including allegations of fraud and mismanagement, minority shareholder oppression and a slew of other issues.

The situation was so contentious that Judge Christopher Yates of the 17th Circuit Court in Kent County wrote in a ruling last year: “Not since Cain and Abel have siblings battled with the ferocity of the Pitsch family.”

In July, when the 10-year-old case finally came to conclusion, Yates wryly noted in his ruling: “All good things must come to an end, even this decade-long contest for control of the Pitsch companies.”

While family businesses are often heralded as outperforming other types of companies, the Pitsch case — and countless others — illustrate that family-held organizations are also prone to deeply damaging and divisive litigation.

Feuds that normally would be left at the office are often carried over to holiday dinners and family gatherings, causing permanent and sometimes irreparable rifts. Disputes and litigation can often drag on for many years, draining the company of resources and crippling the business.

FOCUS ON THE EXTREME

Sources interviewed for this report noted disputes can arise virtually anywhere in a family business, however most point to executive succession events, shareholder issues and the termination of a family member as top areas of contention.

When it comes to preventing disputes at family-held businesses from spilling over into litigation, the best policy is to plan for worst-case scenarios, said Scott Hill, a partner with Grand Rapids-based law firm Varnum LLP.

“If you can focus on the extreme — on the civil war where the business blows up and dies and the relationships ends — and plan for (that) … I think that’s important,” Hill said.

However, Hill and other experts said that many family-held businesses don’t want to game out those scenarios because they often involve uncomfortable conversations about family dynamics that might seem more appropriate in a therapist’s office than a boardroom.

Creating a family council and having regular meetings to discuss problems within the company can often prevent disputes before they spawn litigation, Hill said.

“If you can get the family members to commit to that process, it sort of tamps out disputes before they happen,” he said.

Hill also said it’s important for family members to communicate face-to-face during disputes as emails and text messages can be often misconstrued and exacerbate the problem.

FINDING NONLEGAL SOLUTIONS

While many family disputes do end up in court, there are several non-legally binding strategies that family-held businesses can put into place to both help prevent disputes and mitigate the fallout should a disagreement arise.

Joe Schmieder, a Grand Rapids partner with Chicago-based The Family Business Consulting Group, said non-legal documents such as a family constitution and family code of conduct can greatly reduce the potential for family feuds to spill over into damaging litigation.

“The family constitution could include the family’s vision, mission, policies on employment, education and philanthropy — a lot of things that are very important, but in the heat of battle are hard to come up with a consensus,” Schmieder said. “They’ll try to put guidelines in place, none of which are legally binding, but they guide a family. People remember they were a part of that and they usually abide by that.”

In the case of succession, Schmieder also advocates that the elder generation passes on a “letter of wishes,” a non-legal document that conveys the parents’ goals, wishes and values for the business.

“We find these very powerful because the children know this is what the parents wanted,” Schmieder said, noting that many companies draft these documents.

When disputes do arise, Schmieder said it’s important to have a code of conduct in place that lays out the exact process the parties should follow to solve the disagreement, whether through third-party arbitration or other means.

Overall, Schmeider believes the majority of family disputes are better solved prior to bringing lawyers into the mix.

“As soon as you get attorneys, it ramps things up,” he said. “We live in such a litigious world that sometimes it’s refreshing to have input that’s not in a legal document.”

NAVIGATING TOUGH PROBLEMS

In November 2015, a family dispute between executives of Grand Rapids-based automotive dealer Sharpe Buick Inc. prompted founder George Sharpe to fire his son Blair Sharpe, according to court documents.

The situation quickly escalated into a legal dispute over shareholder rights and a previously signed shareholder agreement. The litigation spawned several deep disagreements over the details of whether or not Sharpe Buick — which operates BMW, Jaguar, Land Rover and Mini dealerships in Grand Rapids — reacted quickly enough to repurchase the shares held by Blair Sharpe, and if he should be allowed to retain his shares in the company.

Ultimately, the Kent County Circuit Court granted Blair Sharpe the ability to retain his shares.

While family shareholder disputes can be messy, many problems can be avoided by forming strong and clear shareholder agreements, operating agreements and dispute-resolution procedures, sources said. When problems do arise, bringing in seasoned family business advisers can serve to soften the blow more.

“You can keep it private and out of court,” said Paul McCarthy, a partner with the law firm Rhoades McKee PC who specializes in family businesses. McCarthy, who represented Blair Sharpe in the Sharpe family dispute, made it clear he was commenting on family businesses in general and not on that case.

When it comes to firing a family member for performance-related issues, sources suggest trying to work with that relative to find another role in the business that suits them better.

Sometimes, though, the company’s leadership may have to make a tough decision to let a family member go. While that can be a difficult choice personally, it’s often essential for the company’s long-term health, according to Rabih Jamal, managing partner at DWH LLC., a Grand Rapids-based turnaround management firm.

“What we’ve found is that if those hard decisions are not made, the business eventually deteriorates and that deterioration itself creates conflict,” he said. “(The conflict) is not with one individual, but now among all the other family members who may be impacted by that decline.”

SMOOTH SUCCESSIONS

In the case of succession planning, Jamal believes starting the process as early as possible, up to a decade in advance in some cases, and bringing in outside advisers can deter problems from forming down the road.

“The best process to follow is to start very early,” Jamal said. “The discussion revolves around the company and preserving the value that has been created over many years, but also what is best for the family and what is going to keep the family together. These conversations are very difficult, so family businesses that do that well often bring in outside advisers to participate.  They are there to make sure the process is fair and that all the family members are heard.”

Moreover, it’s up to the older generation to let go of control of their business to the younger generation and understand the new leaders may not operate it in the same fashion, attorney McCarthy said.

“I’ve seen circumstances where owners are so wedded to their business, their identity is tied into the business,” he said. “Sometimes owners who want to have the business transition struggle with that because it means they have to let go.”

Read 1314 times Last modified on Monday, 18 September 2017 11:00
John Wiegand

Staff writer

jwiegand@mibiz.com

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