Our Case in Point series is a monthly blog written by David Shlagbaum, Senior Counsel/Facilitator and the Head of Pallett Valo’s Family Business Law Group. His series presents case studies focused on real life challenges faced by Family Businesses and Private Enterprises. While David regularly deals with these types of issues in his practice, all names, businesses, events and incidents are used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.
Carnegie Logistics Inc. is a successful trucking company, doing business in Ontario, Quebec and the Eastern seaboard. It is valued at $25 Million. Two brothers, Charles and Rick, started the business 45 years ago. Rick died suddenly last year, leaving all of his shares to his son, Bobby.
Charles, age 65, has been VP Operations for the last 45 years. Charles’ nephew, Bobby, age 45, has been working in the business for the past 20 years and was appointed CEO by his father Rick and his Uncle Charlie three years ago. With Rick’s sudden death, Bobby and Uncle Charles are now equal partners in the business.
Bobby and Uncle Charles do not get along. Uncle Charles thinks his nephew Bobby is ‘too big for his britches’ and is so upset with Bobby, that he is pressuring Bobby to buy him out. Bobby thinks Uncle Charles is old school and would be happy to see him go, so he retains a valuator to come up with a price for Uncle Charles’ shares. Uncle Charles is incensed at what he regards as a ridiculously low price. Charles and Bobby’s father, Rick, had signed a Shareholders Agreement a number of years ago that contained a shotgun clause, and Charles retains a lawyer to advise him on triggering the shotgun. Bobby has also consulted a lawyer, who has told him the shotgun clause is defective. The company’s CFO believes the upcoming legal battle will kill the business and destroy the family. The CFO hopes that engaging Stan, a lawyer specializing in dispute resolution and conflict management can make peace between Bobby and Uncle Charles, and get them to settle on a price.
Stan meets with Bobby and Uncle Charles and explains the facilitation process. They are visibly angry and have ceased talking to each other, but they grudgingly agree to participate in the process.
Stan spends time with each of them individually and they share their views, in complete confidence. Among other things, Uncle Charlie and Bobby are each asked to do an evaluation of the other – ‘so Charlie, give me a report card on Bobby, what are his strengths and weaknesses?’ Uncle Charlie says he thinks Bobby is really smart and is well regarded in the industry, but he keeps everything to himself and Charlie doesn’t trust him one bit. Uncle Charlie is also asked, ‘in a perfect world, what would you like to do?’ Uncle Charlie says, ‘in a perfect world, I would like to keep my investment in this business, because I think we’ve built a great business and I don’t want to lose it, but the trouble is, I can’t live with my nephew’.
Stan brings Uncle Charles and Bobby back to the table and a number of options are laid out for them – Bobby buys Charles, Charles buys Bobby, Bobby and Charles sell the business and so forth. At the same time, remembering Uncle Charlie’s valuation of Bobby, Stan says, ‘What if, instead of anybody selling anything, the two of you stay together?’ After scraping Bobby and Charlie off the ceiling, he explained:
“Uncle Charlie, what if you stopped working for the company and took early retirement but you stayed on as an owner. Bobby, what if you sat with Uncle Charles annually and agreed on a budget and you provided Uncle Charles with monthly financial statements, just like you give the bank, and you provided him with a copy of your annual audited financial statements. In return for that, Uncle Charlie, you will let Bobby run the day to day business and only get involved on major decisions. We will work together to agree on a profit distribution policy so Uncle Charles can continue to get a fair return on his investment in the business, and we will consult with an industry expert to make sure Bobby’s salary is in line with other executives in his industry.” Finally, Stan says, “Why don’t we create an Advisory Board? Remembering that there are only the two of you, you will inevitably have decisions to make that you cannot agree on. The Advisory Board will meet a few times a year and be there to make recommendations. They will also keep things fair and real and help you overcome any impasse. Finally, we will cover some contingencies such as if Bobby dies or becomes incapacitated and, if you really can’t stand each other after a few years, Bobby will have the option of buying Uncle Charlie out at a fair price.”
So what happened? Well, the ‘Untrusting Uncle’ and the ‘Upstart Nephew’ decided to give it a go. Stan spent about a year helping Bobby and Uncle Charlie smooth out the wrinkles and diffuse the mines and Bobby and his Uncle Charlie ultimately signed a new Shareholders Agreement that captured all of that territory. Bobby and Uncle Charlie stayed in business together for the next four years and then they sold the business for about one and a half times what it was worth when they were throwing darts at each other. And Uncle Charlie is still invited to his nephew Bobby’s house for Thanksgiving and Christmas.
So why did they do it? In the conversations with Bobby and Uncle Charlie, it became clear that the business suffered from a lack of process and a lack of structure. That seemed to lie at the heart of Uncle Charlie’s lack of trust. He wasn’t getting timely information and he was worried Bobby was going to pull too much money out of the business and make impulsive decisions. So Uncle Charlie was moved away from only having to trust Bobby and towards trusting a process that each came to recognize as being transparent, timely and fair. From Bobby’s perspective, he was looking for Uncle Charlie’s respect but at the same time felt he needed the freedom to prove his worth as an entrepreneur and he was prepared to demonstrate his accountability in a structured environment.
Does it always end this way? Not necessarily, but its certainly worth a try, and when it works, it’s kind of very nice….
Tune in next month when the Case in Point will be The Case of the Ménage a ‘Deux’