“Partner Disputes In Family Businesses” with Mark Furman of Tarlow Breed Hart & Rodgers

Jonathan (0s):
Welcome back to radio entrepreneurs. I’m Jonathan Freedman and our next guest up needs very little introduction, Mark Furman, shareholder, director of Tarlow breed, hart, and Rogers, it is always a pleasure to see you. How are you Mark?

Mark (12s):
I’m doing well, Jonathan. Great to see you as well.

Jonathan (16s):
Nice to see you. And you as always, we’re going to talk about entrepreneurship and the law and where they intersect. And we’re going to talk about some disputes with the master of litigation, mark Fermin.

Mark (27s):
Well, thanks Jonathan. You know, wanting to talk about, you know, businesses that have more than one owner, you know, there can be disagreements, believe it or not in how the business should be run, who should receive what compensation, how to deal with changing environments. I mean, it’s an unlimited number of things that people can have different opinions about, but certain types of disputes ended up unable to be resolved. Have maybe because there’s not a operating agreement or shareholder agreement that lays out how decisions can be made adequately.

Mark (1m 17s):
Sometimes it’s because some owner feels like someone else’s cheating, taking more money that they’re entitled to, or seizing a corporate opportunity for their own benefit or paying themselves excess compensation. And, and sometimes the fights are just about control and they’re particularly, there’s been some high profile family disputes in, in this area. As you know, the <inaudible> case is the classic example that went on really for very long time and also the legal seafoods.

Jonathan (2m 8s):
And

Mark (2m 9s):
Very recently the president of king doughnut say well known donut shop for people trying to maintain their, their healthy eating habits are brought a suit against all his siblings based upon a fight between over control and other issues. And when there’s a family component to it, it gets even more emotional and that can make it much harder to resolve. But at the core, these disputes are about a business and can be, can impact the potential of the business to survive.

Mark (3m 1s):
I mean, the <inaudible> business is quite large. Family business canes donuts by contrast is a, is a donut shop with few donut shops. And it’s a much smaller business. I think, according to the suit, it does about $8 million in sales per year in total.

Jonathan (3m 27s):
So, so interesting that, you know, in a, that you talk about whether it’s a shareholder dispute to an owner dispute or a family dispute. And, you know, I think from my experience, I would say they’re all disruptive to the business. You know, imagine having to shareholders, if you’re in a company with two shareholders in dispute and trying to function above the line, as they say, while the litigation is going on and you’re being torn apart financially and, and probably emotionally, and at the same time, trying to put on a game face every day and going in and operating a business that happens very often. And to your point, I think magnifying it when you’ve got the family situation, because now you’ve got in all likelihood people outside of the business also chirping in your ear family members and the emotion caught up in that.

Jonathan (4m 20s):
So, you know, complicated things to deal with.

Mark (4m 23s):
Yeah. I mean, I think the disputes are emotional no matter what, but I think family disputes have that heightened level of emotional component to it because look, if, if the older generations selects one sibling and as the leader and you know, the other siblings may feel pretty badly about that. Cause they may have thought that they should have been selected. So that, that emotional component can be very, very difficult. But you know, the rules, the legal rules of the road are quite strict actually in Massachusetts for companies that are incorporated Massachusetts, whether they’re LLCs or, or corporations or whatever, but the people who are the, who were running the business have duties to the company to act in its best interest, certainly, but under Massachusetts law, the owners of closely held businesses, private businesses with a limited number of owners traded as partners.

Mark (5m 46s):
And they owe fiduciary duties to each other, which is the highest duty the law imposes on anything and that’s to act not in their self-interest, but to act in the best interests of the firm and the partners. So that creates a lot of argument for dispute because if someone’s in control, how much they pay themselves can be a challenge. And there, if you have a, an owner minority owner, typically who is not doing a good job or is disruptive to the business when ha coming to the difficult decision to terminate that person or reduce their responsibilities can give rise to a lawsuit that you breached their fiduciary, the fiduciary duties you wrote to them by freezing them out, which is something that is requires a complicated analysis and plenty of litigation’s gets caused by it.

Mark (7m 12s):
So an enormous expense to the business. So you have partners fighting. You have all these litigation costs associated with the dispute. You may have expert fees on, and, and it’s not surprising that sometimes businesses can, their existence can be threatened by one of these disputes. Sometimes it results in the business having to be sold, a happier ending is when things can, maybe someone gets bought out.

Mark (7m 55s):
So, and I’m always struck by the number of businesses that never quite get around to having the shareholder agreement signed or the operating agreement signed. You know, entrepreneurs are a, a hopeful group of people they’re very optimistic and they are, they see the opportunity. It’s so clear to them and they’re less focused on the risks, which, you know, lawyers are trained to look at the risks as you know, Jonathan so

Jonathan (8m 36s):
Well, it’s the classic. Nobody ever gets into a marriage or a business thinking that vote at the end. Right. And, and so, you know, everyone’s full of, I dunno, rainbows and, and happy times. Right?

Mark (8m 49s):
Right. All the way some people enter into prenuptial agreements before they get married, despite that view, but, and many businesses do, you know, get their shareholder agreement or operating agreements done at the outset, but way too many do not. So the question of control competition, what is the scope of the arrangement? So, you know, one, just to give you one example, it’s like, you got to think these things through, you know, the, the boiler plate is that, you know, let’s say we’re in the real estate development business and we’re pardons Jonathan.

Mark (9m 38s):
And, but what we’re really doing is we’re developing the property yet one main street. So while we’re working on that development of one main street, You hear about the opportunity to buy cheap property from an estate at five main street on very favorable terms. Can you do that seems like a simple question. So you consult the, the agreement if there is one and the agreement may describe the scope of the arrangement and whether or not you can develop five main street or may describe your agreement as to develop real estate throughout the Northeast.

Mark (10m 37s):
In which case you’d have a very different answer to the question. And then if you don’t have a partnership agreement or shareholder agreement or operating agreement, then the law is going to have to figure out whether you’ve usurped a corporate opportunity and you got such a great deal on five main street, you’re going to make millions from it. So do I get to have half of it?

Jonathan (11m 6s):
Hmm. So, so it’s interesting because what you’re pointing out is the better, the operating agreement, shareholders agreement up front that stipulates, or spells out the specifics of the arrangement, the better, the likelihood that you avoid litigation, or at least there’s clarity around what you can and cannot do.

Mark (11m 24s):
And clarity can be helpful. Boilerplate is a, is a four-letter word in my it’s more than one word, but it’s just, there’s no such thing as boiler plate. It’s just the words. Yeah. It’s, every situation is different. Every relationship is different,

Jonathan (11m 45s):
But I want to speak to something that you touched on, because I think it’s really important for, for, you know, budding entrepreneurs or people that are perhaps in their first foray into a business, you know, how many active litigation cases, and I don’t mean specific numbers, but, you know, from a majority versus minority perspective that you’ve been involved with over your few years in the law, have you experienced where shareholders are having a dispute and it, it doesn’t create an incredible bumpy road for the business. That’s my experience anyway there. Yeah. And so the ripple effect is huge.

Jonathan (12m 27s):
It’s not only about the litigation, it’s about the survival as you pointed out about the business and where I often see is, you know, litigants trying to keep their employees out of it. Invariably, they get sucked into it in some capacity, you know, in a family dispute and variably other family members get sucked into the litigation. If not directly, then certainly indirectly. And it’s got enormous implications, you know, to, to, and, and no, no disrespect to you cause you deal with this every day. But you know, it, it it’s a little bit, and I don’t know if it’s analogous, but you know, doctors becoming desensitized a little bit to health, you know, terminal illnesses in, in some respect, you know, I think lawyers can be somewhat desensitized to how damaging litigation can be to employees and to owners that, you know, don’t take lightly the emotional impact of litigation.

Jonathan (13m 19s):
There’s certainly the financial cost, but the emotional cost can be high as well.

Mark (13m 23s):
Well, I think when, when both the, the worrying litigants continue to work in the company, I think that’s particularly acute because it, it can’t help, but create a toxic environment when somebody has been terminated from the company. So they’re left is just an owner. Typically it’d be minority owner suing for being frozen out. What happens is the key folks in the company are going to be witnesses. And so you’re going to have the, the expense of those folks having to be deposed.

Mark (14m 10s):
You have the question of whether you’re going to need separate counsel to represent those folks. And so you have someone in controls. So in theory, the company’s just operating without the minority owner, but in practice, you’ve got the CFO sitting for a deposition, the C O O the vice president of sales. And

Jonathan (14m 42s):
So to your point, there’s a lot of people that get sucked into the abyss that is litigation in the complicated, and it impacts the operations.

Mark (14m 50s):
And, you know, in some of those cases, you know, the depositions can go on of each person for three days. Yeah. Yeah. And it’s, it’s very disruptive to the business because it’s not only the time in the deposition. It’s a time preparing for the deposition and arranging counsels. So

Jonathan (15m 10s):
Absolutely Mo marked Fermin, shareholder, director, Charla, Braveheart, and Rogers is always great. We can talk about this topic probably for hours on end. It’s all the time we have for our segment today, but love to come back and talk about her further because it, you know, it’s a, it’s a real concern and maybe talk about, you know, what can potential litigants do to avoid this situation in the fear in the first place. So always good stuff, mark. If people want to get in touch with you, what’s the best way for them to reach out to you.

Mark (15m 37s):
I can be reached at M Ferman, F U R M a n@tbhr-law.com or it’s 6 1 7 2 8 1. I’m sorry, 2 1 8 2 0 2 5

Jonathan (15m 53s):
Mark. Always a pleasure to talk with you, entrepreneurship and entrepreneurship and the law, a lot of things to learn and a wonderful seeing you. And we’ll be right back with another segment on radio entrepreneurs.