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Interview with Law Professor Benjamin Means on Conflict in Family-Owned Businesses: Part Two

Posted in Family-Owned Businesses, Interviews

This is the second installment of a two-part interview of Benjamin Means, a law professor and legal scholar who has published several law review articles on shareholder disputes in closely held business entities. His most recent article, entitled Non-Market Values in Family Businesses, explores legal theory and uses social science in support of his thesis that courts should give greater weight to “family values” in adjudicating corporate dissolution and other disputes among shareholder-members of the same family.
To read Part One of the interview, click here. To download any of Ben’s articles including Non-Market Values in Family Businesses, click here for Ben’s SSRN home page.

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Mahler:  Your article on family businesses discusses social identity theory which, to my minimal understanding, has something to do with explaining how people behave in a group. How does social identity theory help explain the interaction between workplace values and family values?

Means:  The basic idea is that we all play a number of different roles in life, and that each role has its own set of expectations concerning appropriate behavior and values. These cohere into distinct identities, and we may shift effortlessly among several over the course of a day—we go to the office, spend time with a spouse, care for our children, and so on. In a family business, it is much harder for participants to compartmentalize a family and a workplace identity. For instance, if a founder is deciding issues of succession, the temptation to treat all children equally may conflict with the identification of those children who are willing and able to carry on the business.

Mahler:  You included in your discussion of overlapping workplace and family values the below Venn diagram showing the permutations in position and relationship of participants in closely held companies. 

In many if not most of the family business cases I’ve handled, the dispute is between family members who own and manage (#1 in the diagram) and non-manager family shareholders (#4 in the diagram), which pits the interest in growing and re-investing in the business by those earning a salary versus those whose interest mainly is in distributions. How does the diagram fit into your analysis of conflict in the family business?

Means:  Funny you should mention it, because I’m working on an article now that addresses dividend disputes in the context you describe. The passive shareholders only get a return on investment if the corporation pays dividends; meanwhile, the active shareholders take out salary and other benefits. Building on work that Professor Doug Moll has done in this area, my focus is on the positional conflict that the diagram illustrates, even assuming that the controlling shareholders are acting in perfect good faith.

Mahler You also use the term “spillover dispute” to describe a certain species of family business dispute. I’ve never heard that used before in this context. What is it, and what are you differentiating it from?

Means:  The term is intended to capture business disputes driven by outside circumstances. For instance, if a family member marries someone of a different religious faith and then is subjected to a freeze out, this would be a spillover dispute. Other disputes concern business matters but arise because of a conflict between family values and business values. For instance, if a family member lacks the qualifications for a leadership role but feels entitled to the position based on family status, the dispute is internal to the operation of the business.

Mahler:  I was intrigued by one particular observation in your article, in which you say that ‘[c]onnections between family and business law run in both directions,” which appears in the context of your discussion of contract and status in private ordering. What do you mean by that?

Means:  Family law scholars have examined the connection of intimacy and economic life, sometimes borrowing concepts from contract and business organization law to describe the ways that households and marital relationships might be thought of in terms of private ordering. The article contends that we can employ the same types of analysis to highlight the importance of intimate relationships in businesses, especially family businesses. This is the aspect of the article that I’m most excited about, because it creates space for a constructive dialogue between legal scholars that would not ordinarily have much to say to one another. In fact, the family law scholarship offers much of what I thought was missing in the standard account of corporate law. As I continue to develop scholarship in this area, it is enormously helpful to have a rich, existing literature to build upon.

Mahler:  The final section of your article focuses more on the practical realities of conflict in the family business, which you address both at the planning stage of the business and at the litigation stage when disputes can’t be resolved internally. As to the former, what kind of planning peculiar to the family business can be done to avoid dissension down the road?

Means:  Two issues come to mind. The first is nepotism, which I don’t mean in a pejorative sense. If family members work for the business, there is always a danger of conflict, and it may help if the business has clear, objective qualifications in place to prevent the hiring or promotion of under-qualified family members. In some cases, independent supervision could also be an option. The second issue is business succession. Many family businesses have no plan in place for transferring control from one generation to the next, and this failure to think proactively can lead to power struggles and the destruction of value, if not the loss of the business.

Mahler:  How can lawyers be more effective at the planning stage for family businesses, and is there a role for other types of professionals?

Means:  For family businesses, estate planning is probably the best opportunity to work through the governance issues that otherwise get overlooked. For instance, if we want to avoid a situation in which some family members will be active participants while others will be passive shareholders dependent upon dividends, the goal for an estate plan might be to disburse equivalent assets to the family members who will not be actively involved. There is a role for other professionals, including business counselors, and it would be helpful to integrate business and legal advice. I am skeptical about the prospect of convincing a family business to hire multiple advisors, though.

Mahler:  In your article’s discussion of the courts’ role in adjudicating family business disputes, you say that rather than choosing between family values and business norms, courts should address both sides of the equation. The discussion highlights a New York case I wrote about on this blog, called Reichman v. Reichman, in which a son sued his father to regain majority control of a successful online retailer. How does the Reichman case illustrate the tension between family values and business norms?

Means:  In a family business, as you pointed out in your blog post, the members may not document their respective ownership stakes very carefully, much less bargain at arm’s-length for appropriate protections. In Reichman, the parties disagreed about whether the son continued to own any shares in the LLC, let alone a controlling stake. After an initial allocation, the parties had never documented any further changes in ownership. It’s hard to imagine a starker illustration of the difference between family and business norms. I imagine that this situation would be even more prevalent in the context of an alleged general partnership, because there is a fine line between getting help from a spouse and co-owning a business.

Mahler:  Do I correctly sense that you think the appellate court in Reichman, which basically accepted the son’s position based on the limited documentation that existed as opposed to the father’s testimony as to what “really” was going on, got it backwards?

Means:  I’m not sure who is right. On the one hand, I am sympathetic to the notion that the true ownership may not be reflected in whatever outdated documentation happens to exist. In this regard, the trial court seems to have done a very careful job of trying to ascertain the parties’ actual business relationship, taking into account the parent-child context and the gap in age and experience. On the other hand, courts cannot be expected to rescue individuals who enter into poorly conceived agreements and fail to keep records.

Mahler You also say in your article that “[f]or a family value to be implicated by a business decision, it must be part of the parties’ understood business relationship.” How can lawyers and judges translate that concept in the context of an adjudication of claims for oppression or breach of fiduciary duty?

Means:  If the goal is to give effect to the parties’ true bargain, then preexisting family relationships may help illuminate the nature of the bargain. This is, I take it, what the trial court was attempting to do in the Reichman case. When viewed in the context of a parent-child relationship, the handling of ownership interests over time could be given a rational explanation.

Mahler:  If you were standing in front of a room full of judges, sharing your views on the special problems of the family-owned business, and understanding that judges are bound to decide cases within an existing framework of substantive and procedural rules, what practical advice would you give them?

Means:  This is not an area of law in which I think academics have much to offer experienced lawyers and judges; just the opposite is true. So if I had an opportunity to convene a panel of judges, I’d much prefer to get their practical insights than to belabor points they already appreciate. Indeed, just to cite one example, I learned a lot about shareholder oppression law from my appearances before Judge Bellantoni in Westchester County when I was involved in a particularly protracted family business dispute. In hindsight, I suspect that his light hand with respect to discovery disputes and other motion practice reflected a commonsense view that the parties needed time before coming to a settlement. And he was right. In my scholarship, I’d like to accommodate corporate law theories to the evidence, rather than the other way around. But if I can contribute some thoughts along the way about how a contractual approach includes equitable and legal considerations, or how a court might separate questions of scrutiny from substance, or what kinds of family dynamics may be of significance in a particular dispute, so much the better.

Mahler:  Ben, it’s been a pleasure doing this interview, and I look forward to many more articles from you about shareholder oppression and the like in closely held businesses.

Means:  Thanks again for these thoughtful questions and for featuring my scholarship on your blog.