Problems like these can be expensive, says John Collins, a partner in the law
firm of Haynes and Boone in Dallas who specializes in working with family
business owners (he was the Graces’ attorney). He recalls one client, a family
owned business whose founder’s son died at an early age. The son had changed his
will to exclude his ex-wife after they divorced, but he had failed to amend the
trust documents for his children’s trust, and the ex-wife remained its trustee.
She now demands cash payments from the company any time they need her to vote
with her shares, Collins says. “It’s expensive for them,” he notes, “but it’s
easier than fighting her for control of the trust.”With proper planning, family business owners can avoid issues like these
altogether. The first step is creating buy-sell agreements and shareholder
agreements that stipulate who can own stock, how and when it will be
transferred, and how the company or other family shareholders will buy it back.
These contracts typically include an explanation of the stock valuation method
that will be used. By putting these parameters into writing early in the
ownership cycle, they become more resistant to challenges from angry family
members or ex-spouses claiming the formulas were slanted to undervalue their
holdings. Contracts should also include a provision known as a call agreement,
which gives the company or other stockholders the right to buy back stock from
an individual if certain conditions are met. Voting trusts are another legal means for keeping stock from falling into the
wrong hands. They operate in a simple way: Owners place their stock in a trust,
and assign voting rights to trustees who can vote and distribute dividends.
These trusts provide certain tax benefits along with protection from creditors
and unauthorized stock transfers. Additionally, because the owners do not
control the stock directly, voting trusts also reduce friction between family
members over matters of governance. Business owners must also be vigilant about upgrading their shareholder and
buy-sell agreements frequently as the needs of owners, families and the business
change and diverge. “The lifecycles of all three components are constantly
changing,” says Tom Ogburn Jr., director of the Family Business Center at Wake
Forest University’s Babcock Graduate School of Management. “When someone tells
me that they have succession planning all mapped out, I guarantee you there are
things that they haven’t considered in those plans.” Yours, Mine, Ours
Creating an effective stock ownership succession plan can be time consuming and
emotionally draining, which is exactly why so many families fail to do it
properly, if at all. A 2003 American Family Business Survey, conducted by
MassMutual Financial Group and the Raymond Institute, reports that 88 percent of
family businesses surveyed stated a desire to keep the business under family
ownership. Twenty-one percent had experienced at least one owner divorce in the
past five years. Yet nearly 40 percent of respondents had no buy-sell agreements
in place stipulating who could own stock, and 25 percent did not have ownership
plans in place for the next generation. “Family owners will argue about cash and control,” says Greg McCann, an
attorney, certified public accountant and director of the Family Business Center
at Stetson University near Daytona, Fla., “but there is always an emotional
issue underlying it. I had one client who gave one grandchild one share more of
stock than the others got. Twenty years later, the family still had bitterness
about that.” The legal documents that often present the greatest emotional minefield are the
prenuptial or postnuptial agreements, which can force a new or current spouse to
relinquish rights to any company stock. Conversations on this subject are
difficult, sometimes even bitter. “How do you not leave that person feeling
dismissed?” McCann points out. “It’s like saying, ‘Welcome to the family, but
you’ll never get your hands on the stock.’”
|
