family business disputes

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Friday, October 11, 2013 10:30am - 12pm Transitions from one generation to the next have the power to paralyze or energize family enterprises facing family and enterprise challenges. The four presenters, an academic in the field of family business and three mediators experienced in the area will provide their perspectives and experiences in family conflict resolution based on real disputes. The discussion will provide the basis for an interactive analysis with the participants. Among other areas, the presenters will lead a discussion of successful tools and strategies used by the presenters in this complex area. By focusing on real life family business dilemmas, the speakers will discuss how the lack of open communication, understanding and clear family and business goals can jeopardize the survival of a family business.

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Page 1: Family business disputes

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Page 6: Family business disputes

(312) 549-1350 (o)

(312) 848-1350 (c)

[email protected]

191 N. Wacker Dr., Ste. 3700

Chicago, IL 60613

Phillips Academy Andover

1966

University of Pennsylvania

B.A. 1970

The John Marshall Law School

J.D. 1975

Warren has been counseling families and their enterprises as their primary counsel on

a wide variety of issues for over 35 years. Having substantial experience in complex

commercial litigation, arbitration and mediation, often involving family and privately

owned enterprises, Warren focuses his practice exclusively on conflict avoidance

and resolution for families and family owned businesses. Recognizing that family

cohesion is often a key component of enterprise health and generation-to-generation

sustainability, Warren uses a non-adversarial approach as a third party neutral

facilitator and mediator in finding solutions to family and family enterprise conflict. The

many families and enterprises Warren has worked with value his objectivity and ability

to resolve what are often emotionally charged issues.

Warren maintains many active charitable and civic commitments that have included

for many years serving as a Big Brother mentor with Big Brothers Big Sisters of

Metropolitan Chicago. Warren has also served on the Executive Committee of the

Capital Campaign for the Big Brothers Big Sisters of Metropolitan Chicago and the

Capital Campaign Committee for the Latin School of Chicago. Warren was a co-

founder of the Phillips Academy Andover Abbot Regional Association and remains

active as its President.

Warren and his wife, Deborah, live in Chicago and have two daughters who are

working in the not-for-profit field.

Professional A�liations

Member of The Family Firm Institute (FFI);

Chapter O�cer, FFI Midwest Chapter.

Member of the Association for Conflict

Resolution (ACR), active in the Family,

Commercial, Workplace and Elder

Sections.

Member of the Commercial Section

Advisory Council.

Founding member of the Family Owned

Business Group within the ACR’s

Commercial Section.

Routinely presents at industry conferences

as well as to family o�ces and trust

companies.

Facilitator and Certified Mediator

Avoiding & Resolving Conflicts

Received his Mediation Certification at

Northwestern University.

Leads the firm’s Alternative Dispute Resolution

(ADR) Task Force.

Has facilitated or mediated issues in innumerable

matters for families and family enterprises,

including those involving succession,

governance, sustainability, wealth transfer, exit

strategies, among many others.

Advises single and multi-family o�ces, bank

trust departments, trust companies and wealth

management firms on strategies to help their

clients avoid and resolve conflict.

Peer Review Rating

AV Preeminent - 5 out of 5 — The Highest level of

excellence as rated by his independent peers.

(Martindale-Hubbell)

Warren Baker Partner

Page 7: Family business disputes

WORKING WITH FAMILY 3 pathways that strengthen the family and the business.

A framework to understand health family enterprises.

Association for Conflict Resolution Conference

Page 8: Family business disputes

Working With Family…

• Is very common

• Incredibly rewarding • The returns can be much more than money • Socio-Emotional Wealth & Financial Wealth

• There are risks… • Values and work-styles can be at odds • Credibility can erode • Damage to family relationships • Financial loss

Page 9: Family business disputes

Three systems working together

Family

Business Ownership

Page 10: Family business disputes

Three systems working together

Family

Business Ownership

• Issues in one sphere impacts the others

• People Have Multiple roles

• Unconditional & merit based relationships present

Page 11: Family business disputes

The Research • Three Pathways to Evolutionary Survival: Best Practices

of Successful, Global, Multi-Generational Firms • Completed by Dennis Jaffe with support from Family

Business Network and Family Office Exchange• Surveyed 192 global family firms

• Average worth of $400mm • Age of the businesses ranged from 1st & 2nd generation to 7

generations.

• Asked… “what do you do to keep the family firm alive and thriving from generation to generation?”

Page 12: Family business disputes

The Research

Stewarding the

Enterprise

Developing the Next

Generation

Nurturing the Family

Page 13: Family business disputes

The Research Pathway 1: Nurturing the Family

• Clear compelling family purpose and direction • Regular family gatherings • Climate of openness, trust and communication • Sharing respect for family history and legacy • Shared family philanthropic and community service

Page 14: Family business disputes

The Research Pathway 2: Stewarding the Family Enterprise • Strategic plan for family wealth and / or enterprise

development • Active, diverse, empowered board guiding each enterprise • Transparency about financial information and business

decisions • Explicit and shared shareholder agreements about family

assets • Exit and distribution policies for individual shareholder

liquidity

Page 15: Family business disputes

The Research Pathway 3: Cultivate Human Capital for the Next Generation • Employment policies for family members working in the

family enterprise • Agreement on values about family money and wealth • Support for development of next generation leadership • Encouragement for all family members to seek personal

fulfillment and life purpose, regardless of personal or financial involvement in family enterprise

• Age-appropriate education to teach financial skills to young family members

Page 16: Family business disputes

Simply put…

• Pathway 1…. keeping family connected

• Pathway 2… business policies and structures

• Pathway 3… planning for the future

Page 17: Family business disputes

AssociaonforConflictResoluon2013AnnualConference

Workshop—October11at10:30am

FamilyBusinessDisputes:HowMediaonTechniquescanhelpPreventGeneraonalandSiblingConflictfromKillingtheProverbialGoose

MahewL.CarasLeadersLLCPortland,Maine(207)[email protected]

Page 18: Family business disputes

SmithCompany

DonSmith,CEOage70

20%wantstocashout

JoeJones,Presidentage67

20%wantslegacy

JaneSmithNotAnEmployee

age366%

cashout

FrankSmithSalesManager

age3412%career

AlSmithCOOage326%

legacy

JonJonesEngineeringManager

age3910.5%cashout

AnnJonesCFO

age4015%legacy

cousins

Don’schildren–30%total

6%totalto3children

4.5%totalto3children

Joe’schildren30%total

Al’schildren

Jon’schildren

TotalCompany41%Cashout(throughsaleorbuyout)47%Legacy(nosale;nodebtforbuyout)12%Career(needforputopon)

BySmithFamily52%Cashout24%Legacy24%Career

ByJonesFamily30%Cashout70%Legacy

Page 19: Family business disputes

SmithCompany,asecondgeneraonfamilyownedbusinessfoundedbyfirstcousinsDonSmithandJoeJones,isapetroleummarkengcompanywithannualrevenueof$600million.TheCompanyisprofitable,butitsworkingcapitalrequirementsarehigh.TheCompanyhassignificantmarket/enterprisevalueandwouldbeanaracveacquisionforastrategicbuyer.

Thefounders,DonSmithandJoeJones,areabout70yearsold.Donhasthreechildrenbetween32and36yearsold,twoofwhomworkinthebusiness.Joehastwochildren,age39and40,bothofwhomworkinthebusiness.Thereareatotalof10grandchildren,rangingfrom5to18yearsold,noneofwhomworkfullmeinthebusiness.

ForyearsDonandJoeeachowned50%oftheCompany.SeveralyearsagoDonandJoeagreedthateachwouldgive30%ofhisstocktohischildren.ThusDonandJoeeachcurrentlyowns20%oftheCompany.

DonandJoewanttorere.However,DonwouldliketocashoutatthemeofrerementandJoe’swishisforSmithCompanytoconnuetobeownedandoperatedbytheSmithandJonesfamiliesindefinitely.TheheirapparenttoruntheCompanyuponthererementofDonandJoeiseitherDon’sson,Al(whoisCOO),orJoe’sdaughter,Ann(whoisCFO).WhileAlandAnnwouldliketheCompanytobealegacyfamilybusiness,eachhasasiblingwhowantstocashoutnow.Thefihmemberofthesecondgeneraondoesn’tcarewhathappensaslongasheconnuestobeemployedandhasameanstoexitwhenhewantstorereinthefuture.

Thereisnoshareholderagreement,andvotesfollowshares.SaleoftheCompanywillsasfytheobjecve/demandofabouthalftheownershipthatwantstocashout,butwillnotachievetheobjecve/demandofthosewhowanttokeepthebusinessinthefamilies.ThosewhowanttoconnuetoownandoperatethebusinessarenotwillingtoconsiderabuyoutoftheothersbecausethedebttheCompanywouldincurinconneconwiththebuyoutwouldmaketheCompanyvulnerableandwithouttheworkingcapitalnecessarytoconnuegrowing.

Thereexistsadeadlock,withpotenalforligaon—theoutcomeofanyligaonisunpredictablebecausethereisnoapparentlegalbasisforanyaconbyonefaconorfamilyagainsttheother.ItappearsthataconsensualresoluonistheonlywaytoavoidaparalysisthatwouldcauseirreparableharmtotheCompany.Butwhatpossibleresoluonexistswheretheobjecves/demandsofallfamilymembersaresasfied?

Acreavetransacon,focusingontheinterestsofeachpartyinvolved,wastheresoluonthatallowedeachmemberoftheSmithandJonesfamiliestoaccomplishhisorherindividualobjecves.Useofaneutralnegoaonfacilitatorwithinvestmentbankingexperienceaswellasmediaonskillswascricalinnegoangandclosingthetransacon.A“mergerofequals”wasthetransaconthatresolvedthedeadlock.Themergertargetwasacompanythatlackedsuccessormanagement(astrengthofSmithCompany)andthatasaresultwaswillingtopermitMergeCotobecontrolledattheboardlevelandmanagedonadaytodaybasisbymembersoftheSmithandJonesfamilies,providedtheownersofthetargetretainedaroughly50%ownershipinterestinMergeCo.Thecombinedbalancesheetsandcashflowsofthetwocompaniesprovidedtheabilitytostructureputoponsforfamilymemberswhowantedtocashout.

Page 20: Family business disputes

“FAMILY BUSINESS DISPUTES : HOW MEDIATION TECHNIQUES CAN HELP PREVENT GENERATIONAL AND

SIBLING CONFLICT FROM KILLING THE PROVERBIAL GOOSE”

STAGE ONE RELATIONSHIP AND SUCCESSION ISSUES

ACR ANNUAL CONFERENCEOCTOBER 11, 2013

RICHARD LUTRINGER

MEDIATION OFFICES INNEW YORK CITY AND SOUTHERN CALIFORNIA

[email protected]/RLUTRINGER

I. FAMILY BUSINESS DISPUTES/ISSUES INCLUDE :

SUCCESSION [SELECTING, NURTURING, TIMING, RETIREMENT OF FOUNDER]

EMPLOYMENT EXPECTATIONS [HIRING STANDARDS, LEADERSHIP ROLES, RELATIONSHIP TO NON-FAMILY EMPLOYEES]

DISTRIBUTION OF PROFITS [BEFORE, DURING AND AFTER SUCCESSION]

ONGOING MANAGEMENT / SALARIES/ PERKS [OF SIBLINGS WITHIN BUSINESS]

II. THE “FOURTH CIRCLE” — LEGAL BACKGROUND

GENERALLY, 51% = ABSOLUTE CONTROL OVER ORDINARY BUSINESS DECISIONS [I.E. LIMITED DEMOCRACY]

Page 21: Family business disputes

“BUSINESS JUDGEMENT RULE” LIMITS COURT REVIEW OF MANAGEMENT DECISIONS

WITHOUT PRE-EXISTING BUY-SELL OR MANAGEMENT AGT, MINORITY MAY BE LIMITED TO THE “NUCLEAR OPTION”—SEEK DISSOLUTION[CORP :DUE TO OPPRESSION OF MINORITY,NY BCL SEC. 1104-A; LLC “NOT REASONABLY PRACTICAL TO CARRY ON THE BUSINESS IN CONFORMITY WITH THE…OPERATING AGREEMENT” NY LLCL SEC. 702]

III. ISSUES REALLY UNDERLYING FAMILY BUSINESS DISPUTES :

FAIRNESS

RESPECT

CONFUSION OF FAMILY AND BUSINESS ROLES

“CULTURAL” DIFFERENCES (GENERATIONAL, GENDER, BIRTH ORDER, ETC)

LACK OF COMMUNICATION [WITHHOLDING INTENTIONS OR CONFUSING MESSAGES]

SYSTEMIC DYSFUNCTION : SUBCONSCIOUS COLLABORATION OF FAMILY MEMBERS TO

Page 22: Family business disputes

PROTECT THE SYSTEM FROM UNDISCUSSED FEARS AND ISSUES [MORE THAN A MEDIATOR’S JOB-BUT AWARENESS OF ISSUE CRITICAL]

LAIUS COMPLEX

IV. FAMILY BUSINESS DISPUTE OUT –ORANGE COUNTY CHOPPERS (VIDEO CLIP)

GENERATIONAL CLASH OF FATHER (80%

OWNER/CEO) VS. SON (20% OWNER/ SR

EMPLOYEE)

CLIMATE OF OPENNESS, TRUST, RESPECT AND

COMMUNICATION ?

CLEAR EXIT POLICY ?

AFTERMATH

V. TOOLS OF THE FAMILY BUSINESS MEDIATOR

DETERMINE WHICH SYSTEM IS DOMINANT –FAMILY

OR BUSINESS [LOOK FOR SYSTEMIC CAUSES,

RATHER THAN FOCUSING ON THE IMMEDIATE

ISSUE]

WHAT IS THE REAL PROBLEM ? IS THE BUSINESS

ISSUE RELATED TO “UNFINISHED BUSINESS” IN THE

Page 23: Family business disputes

FAMILY SYSTEM ? DOES THE PROBLEM INVOLVE

“SCAPEGOATING” (E.G. WHO CAN WE BLAME ? )

ENGAGE ALL INFLUENCERS ( WHICHEVER CIRCLE

THEY FALL INTO)

DISTINGUISH ROLE AS MEDIATOR FROM FAMILY

BUSINESS ADVISOR

UNLIKE MEDIATION OUTSIDE OF A FAMILY

RELATIONSHIP, IF PARTIES “WALK”, FAMILY

PROBLEM NOT RESOLVED BY MONEY/COURT

[DIFFERENT BATNA]

UNDERLYING “INTERESTS” AMONG ALL PARTIES

OFTEN THE SHARED INTEREST OF KEEPING THE

FAMILY INTACT---RECOGNIZE THAT FAMILY

BUSINESS DISPUTES CAN SPAN GENERATIONS

AND ARE RECURRING DISPUTES [SEE MAYER,

STAYING WITH CONFLICT ]

REFERENCES :

Page 24: Family business disputes

DISTELBERG AND SORENSON”UPDATING SYSTEMS

CONCEPTS IN FAMILY BUSINESSES” (22 FAMILY

BUSINESS REVIEW, MARCH 2009,) PP. 65-81

HILBURT-DAVIS AND DYER, CONSULTING TO

FAMILY BUSINESSES ,

(JOSSEY-BASS/PFEIFFER, 2003)

KAYE , “PENETRATING THE CYCLE OF SUSTAINED

CONFLICT” (THE BEST OF FBR II, 1991), P. 283

LUTRINGER, MEDIATING BUSINESS DIVORCE

DISPUTES”, NEW YORK DISPUTE RESOLUTION

LAWYER, NEW YORK STATE BAR ASSOCIATION

(FALL 2009)

MAYER, STAYING WITH CONFLICT , JOSSEY-BASS

(SAN FRANCISCO 2009)

SPECTOR, THE FAMILY BUSINESS CONFLICT

RESOLUTION HANDBOOK, FAMILY BUSINESS

PUBLISHING CO. (PHILADELPHIA, 2003)

Page 25: Family business disputes

TEUTEL V. TEUTEL, 2010 NY SLIP OP 09248 (2D

DEPT DEC. 14, 2010)

Richard Lutringer is a private mediatorin New York City. He has been certified as a commercial mediator by the Centre for Effect- ive Dispute Resolution (CEDR), the American Arbitration Asssociation (AAA), and the Internat- ional Mediation Institute (IMI),as a community mediator by CMS, Queens, NY and is on the mediation panels of FINRA, NADN and federal district courts in New York and New Jersey. Disputes mediated by Mr. Lutringer include disputes among members of family owned businesses as well as domestic and international industrial, investment and financial companies. Mr Lutringer has been a member of the Board of Directors of ACR-GNY and is currently a member of the board of the New York State Dispute Resolution Association. He has been a regular competition judge and mediator for the International Chamber of Commerce Annual Mediation Advocacy Competition. Full bio available at mediate.com/rlutringer