“Being good is easy — What is difficult is being just.” ~ Victor Hugo
The worst business succession plans that I have ever seen were created by good people who were trying to treat their children equally.
Unfortunately, “equal” does not necessarily mean “fair.”
Example #1. This is the story of Mike and Carol, who operated a profitable business from a building which they happened to own. They had two children, who did not like each other much. Greg ran the business, while Bobby worked elsewhere.
Mike and Carol wanted to treat their children equally. They left the business to Greg, and the building, together with some money (which together were worth about the same amount as the business) to Bobby. Then, to muck things up further, Mike and Carol did an estate freeze and split the fixed value shares equally among Greg and Bobby.
Who could have foreseen that Greg would think that the rent was too high, and Bobby would think that it was too low? Or that Bobby would want to retract the shares just when Greg thought that the business could not afford to pay them out? Or that Bobby would say that, if Greg did not want to pay the increased rent that he demanded when the lease expired, he could just move the business elsewhere? Or that Greg would think that the business could ill-afford to move while it was paying out the frozen shares?
And who could have contemplated that Greg’s life partner may not have liked Bobby much and put in double overtime trying to poison the brothers’ relationship?
Well, a good lawyer with a dose of common sense could have foreseen much of this, and tried to talk Mike and Carol into finding another way to treat their progeny fairly, if not equally.
Or, if Mike and Carol were unable to grasp that their children didn’t actually get along well, and insisted that things be structured this way, good counsel might have at least convinced them to ensure that a comprehensive lease was entered into to address many of these issues. And while counsel was at it, they might have convinced Mike and Carol to put some limitations on the retraction rights in the share structure.
Example #2. This is the story of Amy George, whose accountants thought that it was a brilliant idea for each of her daughters, Regina and Cady, to own 20 per cent of the family business. When Regina proved incapable of working with Amy and Cady, Amy redirected Regina’s career path, put a few million dollars in trust for her, and paid her a salary from the business to which she no longer actually contributed anything of substance.
Fast-forward to Amy’s death: Regina sued the company because she suddenly felt that the dividends allocated to her historically were not large enough, and she had in fact been horribly and actionably oppressed. To make matters worse, the company’s minute books had not been kept up to date, and the approval of financial statements and dividends hadn’t been properly recorded for years. Cady had a real fight on her hands to stop Regina George from destroying the company’s future.
Business succession requires some careful thought. As the fictional president Andrew Shepherd said in the film The American President, “We have serious problems to solve, and we need serious people to solve them.”
Despite the tongue-in-cheek manner in which we sometimes discuss the problems to be addressed in family business succession, doing the work well requires counsel with a particular sensitivity to the issues, a good temperament and, above all, real expertise in identifying and addressing a wide range of issues that don’t arise in arms’ length deals.
This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.