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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.


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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. Poor Judge Brown probably thought that by slavishly serving the godz of the age her violations of 18th century concepts like due process and the rule of law would be overlooked. Mayhaps she was merely a Judge ahead of her time?

  2. in a lawyer discipline case Judge Brown, now removed, was presiding over a hearing about a lawyer accused of the supposedly heinous ethical violation of saying the words "Illegal immigrant." (IN re Barker) http://www.in.gov/judiciary/files/order-discipline-2013-55S00-1008-DI-429.pdf .... I wonder if when we compare the egregious violations of due process by Judge Brown, to her chiding of another lawyer for politically incorrectness, if there are any conclusions to be drawn about what kind of person, what kind of judge, what kind of apparatchik, is busy implementing the agenda of political correctness and making off-limits legit advocacy about an adverse party in a suit whose illegal alien status is relevant? I am just asking the question, the reader can make own conclsuion. Oh wait-- did I use the wrong adjective-- let me rephrase that, um undocumented alien?

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  4. You can put your photos anywhere you like... When someone steals it they know it doesn't belong to them. And, a man getting a divorce is automatically not a nice guy...? That's ridiculous. Since when is need of money a conflict of interest? That would mean that no one should have a job unless they are already financially solvent without a job... A photographer is also under no obligation to use a watermark (again, people know when a photo doesn't belong to them) or provide contact information. Hey, he didn't make it easy for me to pay him so I'll just take it! Well heck, might as well walk out of the grocery store with a cart full of food because the lines are too long and you don't find that convenient. "Only in Indiana." Oh, now you're passing judgement on an entire state... What state do you live in? I need to characterize everyone in your state as ignorant and opinionated. And the final bit of ignorance; assuming a photo anyone would want is lucky and then how much does your camera have to cost to make it a good photo, in your obviously relevant opinion?

  5. Seventh Circuit Court Judge Diane Wood has stated in “The Rule of Law in Times of Stress” (2003), “that neither laws nor the procedures used to create or implement them should be secret; and . . . the laws must not be arbitrary.” According to the American Bar Association, Wood’s quote drives home this point: The rule of law also requires that people can expect predictable results from the legal system; this is what Judge Wood implies when she says that “the laws must not be arbitrary.” Predictable results mean that people who act in the same way can expect the law to treat them in the same way. If similar actions do not produce similar legal outcomes, people cannot use the law to guide their actions, and a “rule of law” does not exist.

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