It’s not surprising that the ancient adage, “Never mix family and business,” is more honored in the breach than the observance. After all, as the late Professor Larry Ribstein observed in his terrific 2010 research paper entitled “Close Corporation Remedies and the Evolution of the Closely Held Firm” (reviewed here):
The earliest small firms were partnerships, which began as intimate, usually family, relationships. They were referred to as ‘compagnia,’ which means those sharing bread, reflecting their origins in households. Kinship ties were an important mechanism for controlling agency costs. As Kerim told James Bond in From Russia with Love, “all of my key employees are my sons. Blood is the best security in this business.”
Blood may be the best security in some family-owned businesses, but in many others the same bonds of kinship and trust that induce family members to enter into a business association in the first place, when abused or perceived to be abused, can and often do instigate conflict, entropy, and ultimately the dissolution of the firm and destruction of family ties. In other words, the emotional ties that encourage family members to dispense with diligence and formalities when starting and operating a business can also drive them apart with even greater force when things go wrong, in no small part due to those very dispensations.
For this column I’ve chosen three recent, illustrative cases presenting dissolution and related claims involving family-owned businesses. The substantive issues in each case are interesting and informative, if not novel. I wasn’t involved in any of the cases, so I can’t really say to what extent the blood relations of the parties contributed to the outbreak of hostilities or the underlying problems. But I think it’s fair to say that each case in its own way shows tell-tale signs of the dysfunctional circumstances and dissension peculiar to business divorce, family style.
The case summaries follow after the jump.