George P. Bukuras, BridgeTower Media Newswires
Consider the following fact pattern:
You are counsel to a second-generation family-owned business. The business was founded by two brothers, now deceased. The company is owned by two sets of first cousins, seven in all. Not all owners are employed by the business. All seven owners are directors.
The business is moderately profitable, but not as profitable as it might be due to organizational confusion. The business has reached a tipping point in which the informal entrepreneurial energies that gave the company flight will no longer lead to higher altitude. Systems of corporate governance exist in form only.
Conflict abounds, both in the family and in the business. There are tensions between the employee owners and non-employee owners over the matter of key-executive bonuses and owner distributions. Those owners not involved in the business believe executive bonuses to be excessive, thus diminishing monies available for distribution to shareholders. Those owners who are employees and recipients of bonuses think differently.
There are also tensions among the owners who work in the business, only two of whom hold management positions, one the presidency. The non-management owners, salesmen both, resent that they do not have a seat at the management table and often undermine the authority of those in management.
There are tensions relating to the suspicion that one of the employee-owners is involved in an illicit relationship with a key non-owner employee. The spouse of this employee-owner has recently moved out of the family home, and the owners fear what the effect of a divorce and/or the suspected employee relationship might have on the business.
There are tensions as a result of the last board meeting, when one of the non-employee owners, a professor at a local business school, argued that the company has reached its zenith under its present ownership, and that the best course for stockholders at this point would be for the family to sell the business.
At the conclusion of the board meeting, you were approached by two non-employee owners, who asked what their “rights” were with respect to distributions. You had to explain that your loyalty was to the corporation, and, therefore, you could not give legal advice to the owners individually. You were then asked, in turn, if you could provide a referral to a lawyer who knows something about “fiduciary law.”
Recently, the president of the company attended a trade conference. One presenter, a woman who owned a family business consulting firm, described her approach as engaging in a series of private discussions with each family member and select non-family key employees in order to facilitate the adoption of functioning systems of governance within the business and the family.
The president, burdened by accelerating tensions and not knowing where else to turn, subsequently met with the consultant, who he thinks might be able to help. He has emailed you seeking your thoughts.
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Analysis
You have had experience with family business advisors before, and you understand positive change is possible. However, you are concerned that tensions may have risen to a level at which the likelihood of peaceful resolution is improbable.
Tensions have reached fever pitch. Owners are seeking their own counsel, and litigation on at least one of many fronts seems more likely than not. You begin to contemplate, therefore, what the effect might be to your client of bringing in a consultant who will engage in intimate dialogue with all the participants and potentially be available to litigating parties as a witness.
You also understand that in those situations in which third-party intervention is effective, there must be honest communication between the third party and members of the family and the company — and a shared goal among the owners to work toward peace and order.
Given the subtle saber-rattling that has taken place, you wonder whether any of the participants have the comfort to be truly open with the consultant. Worse yet, you have concern that a savvy potential plaintiff might try to manipulate the process to his or her own end.
You conclude that the safest way to proceed is for you, as corporate counsel, with the benefit of privilege, to continue to work with the company in an attempt to establish effective governance.
However, it is a role you do not relish, and though try you must, you have been at this too long with this family to be bullish about success. You advise your client accordingly.
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Alternative solution
What makes this fact pattern difficult to address has far less to do with the nature of the tensions noted than it does with where the family is positioned on the continuum of conflict.
Had the family sought intervention at an earlier stage, when the notion of litigation was still an abstract concept, and when the characters in this play all yearned for — and were open to — the possibility of achieving peaceful order, the situation would not be so dire.
Ironically, just as it would have been easier to propose a third-party intervention as a solution earlier on the continuum, so too will it be easier after litigation has been commenced. The parties, battle-scarred through litigation, might well consider third-party intervention in the form of mediation.
Why might third-party intervention through a mediator work now, but not through the family business consultant before litigation? Because unlike the intervention of a family business consultant, all communications and work product relating to a mediation, through a qualifying mediator, is confidential pursuant to statute.
Moreover, the cost and trauma of litigation sometimes brings about shared purpose among litigants (i.e., bringing an end to the cost and trauma of litigation).
The problem with this new, litigation-generated shared objective is, however, that though a mediated resolution might well bring an end to the litigation, it likely will do nothing to enhance the functioning of the business — and it will almost certainly leave the family permanently fractured.
You may be thinking: It is unfortunate that the same benefits derived through a mediation, post commencement of litigation, are not available to the family business consultant pre-litigation. The good news is, they are. Here’s how:
The family might consider entering into a Family Business Mediation Engagement.
An FBME is a service model offered by some family advisory firms that approaches the task of family business advisory in a multi-disciplined manner. It is an approach that provides the client with the same comprehensive advisory assistance of the family business consultant, under the umbrella of the mediation process.
Such an intervention, cloaked with privilege-like protections, allows for avoidance of the cost and trauma of litigation, resolution of the confusion and conflict ailing the business, and preservation of a reasonable degree of family unity.
Chapter 233, §23C, provides that all work product made by a mediator, and all communications made by “any person” in the presence of a mediator, in relation to a mediation shall be deemed a “confidential communication and not subject to disclosure in any judicial or administrative proceeding ... .”
Not just any advisor may qualify for protections under the statute, however. The statute requires that the mediator must have completed at least 30 hours of training in mediation and either have four years of professional experience as a mediator, or be accountable to a dispute resolution organization that has been in existence for at least three years.
The engagement begins with a written agreement between the mediator and both the family and the business entity to identify and mediate issues within the family and business dynamics that give rise to the presenting conflicts.
The agreement typically provides that the mediator may be assisted, in a subordinate capacity, by others with complementary business-human factor disciplines (e.g., financial professionals, psychologists, HR professionals, etc.).
The privilege-like confidentiality afforded by statute typically allows the participants to cooperate and communicate with the mediation group honestly, thus enhancing the process of bringing about change.
That the business becomes a party to the mediation allows key employees to participate in the process as well, in the comfort of knowing that any information or work product shared with the mediator will remain in confidence.
For the process to work, in addition to the statutory requirements, it is essential that the chief mediator-family business advisor possess the requisite experience in law and business operations to deal fluently and experientially with the business matters giving rise to conflict. In addition to serving as “concert master” of sorts, vis-à-vis those assisting in the mediation process, such experience is necessary to help the family and the business achieve effective systems of governance in order to both manage conflict and position the business to thrive and grow so that it might provide for future generations.
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George P. Bukuras, a lawyer and CPA, is founder of Milestone Business Associates, a family business advisory firm that uses a multi-disciplinary approach to counsel business and family.
