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Business agreements provide roadmap for changes in family-run enterprises

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Indiana Lawyer Focus

Integrate family into small business ownership and the potential for rivalry, high emotions and different agendas increases, especially as the business is passed from one generation to the next.

The dispute rocking the Holiday World & Splashin’ Safari theme park in southwest Indiana shows what can happen when a family fights over a business but, attorneys say, it is an extreme and uncommon situation. Usually members of a family or multiple shareholders in a closely held company work through their dispute outside the courtroom.

Still, Holiday World could become a teaching tool. Lawyers will be able to point to what happened there to convince clients of the need for legal agreements regarding ownership, division of duties, succession and procedures for cashing out.
 

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The goal of these agreements is to ensure the continued success of the business, said Shannon Frank, of Kahn Dees Donovan & Kahn LLP in Evansville. In addition, the legal documents can help a family get along in a business so they can also get along at the Thanksgiving table.

Ronald Katz, co-founding partner of Katz & Korin PC, described these agreements as roadmaps, detailing how to handle future events as well as dealing with here-and-now issues like compensation, liabilities and division of responsibilities. They also provide protection to the parties that have come together to start and grow a business operation.

A business that has multiple owners but fails to plan is really rolling the dice, Katz said.

Attorneys advise that shareholder agreements, operating agreements, buy/sell agreements, or succession agreements should be in place in any small business, whether owned by a family, an individual, or business partners. They should also be written early when everyone is cooperating.

The contents of the documents can vary from business to business, but a key topic they should address is what happens in the event of a death or disability of the primary owner, said David Barrett, partner at Faegre Baker Daniels LLP. These agreements can require consent from multiple stakeholders, rather than just the principle shareholder, before the business is sold or makes a major investment.


barrett-david Barrett

Barrett highlighted one succession agreement he worked on with a father who wanted to sell the business to his two children. The document included language outlining how the business would eventually be passed to the man’s grandchildren, who were as young as 10 years old at the time.

That agreement was unusual, Barrett said, since taking the business through different generations makes the process more difficult. Here, the father wanted his grandchildren to replicate the path his children took into the business. Namely, he wanted the third generation to work for other companies and gain relevant experience before joining the family business.

Typically, most agreements focus on one generation transferring the enterprise to another, Barrett said.

Frank said the agreements should consider the personalities involved and the skills each individual brings. But primarily, she said echoing Barrett, the documents should spell out what happens when an owner dies or retires.

Without a succession plan, the survivors could rely on the deceased owner’s will to determine the division of assets, Barrett said. Deciding to split the business evenly between the heirs can bring problems in subsequent years as the children of each heir become adults.

If one of the heirs’ children or grandchildren wants to cash out of the business, problems could arise in determining which heir is in control to make decisions regarding any sale of shares.

In some circumstances, decisions about succession and assets could be decided by lawyers, explained John Maley, partner at Barnes & Thornburg LLP. With no clear direction from the owner, outside parties could decide the fate of the business.

The family feud among the shareholders of Holiday World was ignited after the sudden death of the president and majority shareholder, William Koch. Although the agreement includes a succession plan and method for valuing the shares, Dan Koch, William’s brother, and Lori Koch, William’s widow, are battling over the exact dollar amount.

The fight has landed in the Indiana Court of Appeals. Attorneys representing the feuding family members argued before the judges Aug. 6. No decision has been rendered although, during oral arguments, Judge John Baker said the court can probably do nothing to help this fractured family.

None of the attorneys interviewed for this story had direct involvement in the Holiday World dispute nor any connection to the parties involved. However, all said the Holiday World situation is an outlier. Often if a dispute arises, families and shareholders will try to negotiate a solution between themselves. Pursuing litigation and turning to the courts is unattractive largely because of the costs involved.

“My experience, most of (these agreements) work, but another lawyer may have a very different experience,” Frank said.

Both Frank and Barrett said writing business agreements should be done deliberately. Hoosiers can set up their businesses through the secretary of state without any input from attorneys, but if a dispute erupts or one of the shareholders wants to divest, hammering out an agreement then can be difficult at best.

Katz said sometimes putting a business agreement together is not too difficult, while other times it can resemble trying to get the Arabs, Palestinians and Israelis to the peace table. Dissecting the issues and determining what people truly want to achieve is often the challenge.

The key to a good business agreement is communication, Barrett said. He advised business owners seek the advice of peers as well as professionals.

For lawyers, the goal is to write a document that is clear and leaves little room for interpretation, Frank said. Still, one must remember that different people can offer different interpretations of the meaning. And even when the parties have previously committed to an agreement, one could later argue that he or she does not agree to the terms, Katz adds. A party could contend the circumstances have changed or the relationship has been altered to the point where the agreement no longer governs.

Or, he added, the terms could be clear but the parties argue anyway. “We are not the ensurers of our clients being reasonable,” Katz said.•
 

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  1. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

  2. When I served the State of Kansas as Deputy AG over Consumer Protection & Antitrust for four years, supervising 20 special agents and assistant attorneys general (back before the IBLE denied me the right to practice law in Indiana for not having the right stuff and pretty much crushed my legal career) we had a saying around the office: Resist the lure of the ring!!! It was a take off on Tolkiem, the idea that absolute power (I signed investigative subpoenas as a judge would in many other contexts, no need to show probable cause)could corrupt absolutely. We feared that we would overreach constitutional limits if not reminded, over and over, to be mindful to not do so. Our approach in so challenging one another was Madisonian, as the following quotes from the Father of our Constitution reveal: The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse. We are right to take alarm at the first experiment upon our liberties. I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations. Liberty may be endangered by the abuse of liberty, but also by the abuse of power. All men having power ought to be mistrusted. -- James Madison, Federalist Papers and other sources: http://www.constitution.org/jm/jm_quotes.htm RESIST THE LURE OF THE RING ALL YE WITH POLITICAL OR JUDICIAL POWER!

  3. My dear Mr Smith, I respect your opinions and much enjoy your posts here. We do differ on our view of the benefits and viability of the American Experiment in Ordered Liberty. While I do agree that it could be better, and that your points in criticism are well taken, Utopia does indeed mean nowhere. I think Madison, Jefferson, Adams and company got it about as good as it gets in a fallen post-Enlightenment social order. That said, a constitution only protects the citizens if it is followed. We currently have a bevy of public officials and judicial agents who believe that their subjectivism, their personal ideology, their elitist fears and concerns and cause celebs trump the constitutions of our forefathers. This is most troubling. More to follow in the next post on that subject.

  4. Yep I am not Bryan Brown. Bryan you appear to be a bigger believer in the Constitution than I am. Were I still a big believer then I might be using my real name like you. Personally, I am no longer a fan of secularism. I favor the confessional state. In religious mattes, it seems to me that social diversity is chaos and conflict, while uniformity is order and peace.... secularism has been imposed by America on other nations now by force and that has not exactly worked out very well.... I think the American historical experiment with disestablishmentarianism is withering on the vine before our eyes..... Since I do not know if that is OK for an officially licensed lawyer to say, I keep the nom de plume.

  5. I am compelled to announce that I am not posting under any Smith monikers here. That said, the post below does have a certain ring to it that sounds familiar to me: http://www.catholicnewworld.com/cnwonline/2014/0907/cardinal.aspx

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