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.
Canterbury Auto is a successful auto dealership in London, Ontario, established by Gus Genovese in the early 1960s. Gus later brought his daughter, Sophia, into the business and, 5 years ago, Sophia bought 50% of the business from her dad and has just finished paying off the purchase price. Gus is in his early 80s and semi-retired but still retains his position as Chairman of the Board. Sophia runs the business now. She prides herself as having earned a reputation as a tough operator in an old boys’ business. Sophia wanted to buy out Dad entirely but he insisted he wasn’t ready to be “put out to pasture” yet.
Gus’s first wife died a number of years ago. Sophia was their only child. Gus married Marlene 3 years ago. Marlene’s son, Peter, is a recent graduate of the MBA program at Harvard Business School. Marlene and Sophia have a polite relationship. Marlene was hoping Gus would be able to offer Peter a job in the business. Gus approached Sophia about it and she resisted. Sophia doesn’t like Peter. She thinks he’s cocky and entitled.
Sophia is increasingly worried about Gus. Lately, Gus has been having some cognitive issues. They have never discussed Gus’ estate plans. She doesn’t even know if he has a will. Marlene is much younger than Gus and the last thing Sophia wants is having Marlene as her partner.
Sophia raises the issue of buying out Gus’s interest again. Gus blows up at her. “Everything you know about this business comes from me. The boys out there, they will destroy you if I’m not around! Be grateful for what you have and let’s not talk about this again!”.
Sophia persists. “Ok, if you won’t let me buy you out, we should at least have a shareholders agreement. If something happens to you, I have no security. For all I know, Marlene will inherit your shares and there’s no way I’m going to share the business with her!”. Gus shouts back “We don’t need a damn shareholders agreement! Marlene is my wife. She’s family. Family doesn’t need a shareholders agreement and I will do what I want with my shares.”
Sophia is distraught. She meets her friend Elena, an Estates lawyer and becomes even more distraught. Based on what Sophia has shared with her, Elena is concerned that if Gus continues to deteriorate he may not have the capacity to enter into a shareholders agreement or to sign a will for that matter. She recommends a colleague, Jeremy, who is a transition planning specialist and a facilitator and may be able to help.
Sophia meets with Jeremy and expresses doubt that Gus will ever agree to meet with him. Jeremy comes up with an idea. “I worked with another family in the same business as yours and our work had a pretty successful outcome. Your dad may even know Harrison, the founder. If you’d like, I can ask Harrison if he’s prepared to talk with Gus.” Sophia agrees.
It turns out Harrison and Gus belong to the same golf club. One round later, dinner and a nice wine, Gus listens to Harrison and is impressed at what Harrison and his family were able to achieve with Jeremy. Gus agrees to meet with Jeremy and Sophia.
Jeremy sets out his process and they agree to give it a go. Jeremy meets separately with each of them.
Jeremy’s meeting with Sophia is stressful. All the years of frustration and the battles with dad come pouring out. “He won’t let me buy him out. He keeps insisting that we hire that little jerk Peter so he can make his wife happy. He does nothing but undermine me with the staff and its scary how much he doesn’t remember. The business has changed. All his cronies are dying off. People are buying or leasing our cars online now. Gus doesn’t own a computer! I don’t even want to get into a shareholders agreement with him but I have no choice. I have to protect myself.” Jeremy asks, “In an ideal world, what would your world look like?” “What would my world look like?” Sophia says, “I want him out, period!! Take his trophy wife and his little ignorant son and go retire somewhere.”
Jeremy’s meeting with Gus is not much better. Gus says he won’t leave the business and rails about Sophia’s lack of gratitude and her lack of respect for Marlene. Gus insists the only way he will enter into a shareholders agreement with Sophia is if they share decision making and she agrees to give Peter a job. Sophia balks at both of those ideas. She also demands that the shareholders agreement have a shotgun clause so either party can force the other out if they’ve had enough.
After some more back and forth, Jeremy proposes that Gus and Sophia enter into a shareholders arrangement, to include the following terms:
- A governance process that allows Sophia to continue her role as CEO, with an obligation to consult with Gus and obtain his consent on certain major matters affecting the business;
- A reporting structure that will continue to keep Gus informed on what’s going on in the business on a timely basis;
- A right to buy on the part of both shareholders in the event of the death or disability of the other;
- A shotgun buy/sell provision, with a proviso that it can’t be activated for at least 2 years after the agreement is signed – the purpose, to give the agreement a chance to work
- In addition, Sophia has found Peter a job with a friend who is an auto parts distributor and agrees that if he proves himself there, the business will offer him a position.
Some further jockeying and a shareholders agreement is signed, reluctantly.
And the rest of the story?
Jeremy checks in on Gus and Sophia periodically over the next year or so. Things are testy but civil. A little over 2 years go by and Jeremy decides to follow up again. He calls Canterbury Auto and asks for Sophia. “I’m sorry, Ms. Genovese is no longer with the company.” says the receptionist. Jeremy is in shock. What happened??
He calls Sophia’s cell and she tells him the story. Sophia bided her time until the 2 year moratorium was up then pounced on the buy/sell, expecting Gus to capitulate, of course. Turns out little Peter had some friends in the private equity community who were prepared to back Gus on a buyout of Sophia’s interest.
“So what now, Sophia?” Jeremy asked. “Well,” said Sophia, “ I remembered your advice to Gus and me that if we were to exercise the buy/sell, be sure to set the price close to market value, because you never know if you’re going to be a buyer or a seller. Well, I remembered, so I got a good buck for my shares. Oh, and remember how Gus was dead set on not having a non-compete clause? “You buy me out, you’re on your own, young lady”. Remember that? Well, in the end, that turned out to be a gift. I’m getting back into the business!”
Jeremy remembered his first conversation with Sophia a few years back. She told him then, “I want him out!!”. Well, she got her wish.
Tune in next month when the Case in Point will be The Case of When ‘God’ Got in the Way.