The statistics paint a sobering picture for privately-owned businesses. Between two and three million privately-held U.S. companies are owned by Baby Boomers who are approaching transitional events. Yet the vast majority of them have done little or no exit planning, and many owners do not even know the value of their business despite having much of their personal net worth tied up in it.
In the coming years, many financial, accounting and estate-planning professionals will inevitably encounter clients grappling with succession disputes within their enterprises. Understanding the dynamics at play and the potential legal pitfalls can help these professionals better serve their clients during what are often emotionally-charged and financially-complex transitions.
Competing Priorities Create Conflict
Business owners approaching retirement typically prioritize a few key objectives: maximizing value through optimal sale price and tax consequences; obtaining immediate cash; preserving company culture and mission; ensuring continued employment for family members and other employees; and maintaining some post-transaction involvement. These priorities vary significantly based on age, whether the owner actively works in the business, and how much of the owner’s personal wealth is concentrated in the company.
A challenge arises when the principals hold divergent views about the company’s future. One principal may want to keep the business in the family, while another prefers to sell to the highest bidder. One owner may prefer splitting up the business by geography or product lines; another may favor a sale of the entire business to private equity or a strategic buyer. And most frequently, principals often disagree about who should take control of the business.
Understanding the Legal Framework
The resolution of these conflicts depends in large part on the entity type, the company’s governing documents and applicable state law. Restrictions on an owner’s right to sell are generally permitted, but exceptions exist under shareholder/operating agreements or when the owner can establish breach of fiduciary duties.
Directors, officers, and controlling owners owe fiduciary duties to not just the entity but also other owners. These duties include loyalty, which requires prioritization of the entity’s interests over personal interests, and care, which demands diligent discharge of responsibilities with informed business judgment. These obligations shape relationships among principals who may wear multiple hats – owner, director, officer and employee.
Strategic Considerations
The approach to managing these disputes depends significantly on whether the client is a majority or minority owner. Majority owners typically control employment decisions, compensation and the company’s narrative, while minority owners retain rights to information, participation in management and protection from oppression.
When disputes escalate, potential claims can include breach of fiduciary duty, breach of contract, minority shareholder oppression, and various ancillary issues. Available remedies range from access to a company’s financial information and other books and records, monetary damages and injunctions, to more drastic measures like a forced buyout, appointment of a custodian or involuntary dissolution.
The Path Forward
Private-company disputes are often ripe for settlement due to their expensive, time-consuming, and emotionally-taxing nature. Common settlement structures involve buyouts of certain owners’ interests with payments over time, resignation from operational roles, confidentiality and non-disparagement provisions, and careful attention to tax considerations.
The takeaways for financial, accounting, and estate-planning professionals are clear: encourage advance planning before conflicts arise; engage appropriate professionals to understand business valuation under different transaction scenarios; facilitate negotiation through third parties when necessary; and maintain awareness of clients’ legal rights to ensure proper documentation and planning.
While litigation may sometimes be unavoidable, public disputes rarely serve anyone’s interests, making confidential negotiation the preferred path. Because most financial planners and accountants enjoy a trusted, long-term relationship with their clients, they are uniquely positioned to help prevent protracted disputes that can destroy both personal relationships and business value.
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