Family businesses many times include not just family members, but the spouses of family members, as well. And should any of the family members who are stockholders pass away or should their marriages fail, the old cliche, "All is fair in love and war" can sometimes hit too close to home for comfort. So what can a family business do to raise the odds that the family business stays in the family?
I advise my clients who feel strongly about ownership of the business staying in the family, to instruct their attorneys to include language in the company's by-laws that strictly forbids anyone outside the bloodline of a particular family member from becoming a stockholder.
Such language will not prevent divorced spouses from receiving a settlement, but it does ensure that company stock will not be a part of any such settlement, thus ensuring that the stock stays in the family.
One of my clients shared with me the following language from their S Corporation's Stock Transfer Restriction Agreement:
"Death of a Stockholder.
"a. Upon the death of a Stockholder, or the death of the beneficial owner of any Stockholder which is a trust ('Trust Stockholder'), the stock owned by or on behalf of the decedent shall be sold as provided in Section 2(b) except that such stock may be transferred to beneficiaries of the deceased Stockholder or Trust Stockholder, as the case may be, if all conditions stated below have been satisfied.
"i. The beneficiaries of the estate of such deceased Stockholder or the beneficiaries of a Trust Stockholder who will receive such stock outright are Eligible Stockholders. For purposes of this Agreement, Eligible Stockholders are the natural and adopted children, grandchildren and great-grandchildren of the late (founder's full name) and those great-great-grandchildren if consent to a transfer to them is given by the Board of Directors.
"Restrictions of Lifetime Disposition. None of the Stockholders shall sell, assign, pledge, or otherwise transfer or encumber in any manner or by any means whatever any interest in all or any part of the capital stock of the Company without first obtaining the prior written consent of its Board of Directors except that the following transfers may be made without consent of the Board of Directors."
Dissension among family members is bound to occur, however, with or without divorce entering the picture. Perhaps the most frequent conflict I have encountered occurs when the spouse of an owner who does not work in the family business is more ambitious than the family member who does work in the business. In such cases, the spouse outside the business can exert some pretty strong influence, causing the stockholder to feel pulled both ways.
The following conversation was reported to me by a disgruntled spouse: "Your family is not treating you fairly. As the eldest child of the owner you were entitled to that promotion. If you don't walk into your father's office and demand your rights, I'm going to do it myself."
The best way I've found to head off such conflict is to frequently remind the stockholders both verbally in one on one meetings -- and in writing -- that it is the policy of the business to operate on the merit system, which means that family members will be treated equitably and not necessarily equally. Based on the best judgment of the officers of the company, the most qualified person -- whether that person is a family member or not -- will be receive promotions within the company. Family members are not entitled to preferential treatment.
Should highly qualified non family members perceive that they are playing against a stacked deck, the company will surely suffer from a flight of talent to a competitor or another organization where they believe they can compete for advancement on merit.
Another frequent source of conflict in closely-held family businesses is the strategic direction of the business. Some stockholders may be far more ambitious for the business than others, thus another risk of internal strife.
Businesses that operate like a ship without a rudder -- those that engage in little formal strategic thinking -- are bound to run aground. Therefore, I recommend that all businesses, regardless of their size, make the formal determination of at what rate the stockholders wish to compound sales. All stockholders can have their say, but when the votes are counted, everyone understands in measurable terms what the business is striving to achieve.
Over-communication is a good rule of conduct between top management and all other stockholders. When dissention occurs, the reason is frequently because a policy decision was made by one or more stockholders behind another stockholder's back and a stockholder gets his or her feelings hurt.
When all stockholders understand both the strategic direction of the company, their individual roles in the organization and what they must do in measurable terms to achieve a particular goal or objective, internal dissention drops significantly.
While legal language can protect the family from an in-law becoming a stockholder, good communication goes a long way toward keeping both stockholders and their spouses on the same page. How effectively does your company communicate with its stockholders? Do all stockholders know in measurable terms what they must accomplish to advance in the corporation?
Bill Lee is a business consultant, columnist, speaker, and seminar leader who works extensively throughout North America. He also is affiliated with Lee Resources, a Greenville, S.C.-based consulting, training and publishing organization.
