Attorneys who represent family businesses must be knowledgeable
about corporate governance, but they also have to know the players
involved -- a soft skill that sometimes requires a hardline
"A good lawyer for a family business has to be sensitive to issues
in the family," says Robert McLaughlin Sr., managing and senior
partner of Gilman, McLaughlin & Hanrahan LLP. "It should be
someone who is aware of family dynamics, and who can play a role as
advisor in conflicting situations that develop." A family-business
advisor should not be a specialist, but a generalist, "which is a
vanishing animal in the practice of law," he says.
McLaughlin's resume includes representing three independent
directors in the aftermath of the Demoulas family's years-long
legal battles, as well as dozens of other lesser-known but no less
contentious cases. Not surprisingly, the issues of insiders versus
outsiders, control and compensation are at the top of the list of
In addition to the sensitivity to family issues has to be some
cold, hard calculation -- and on occasion, stepping back. "Lawyers
make this mistake -- they are introduced to [the business] by one
of the partners," McLaughlin says. "As possible conflicts develop,
as a lawyer, you have to remember that your obligation is to the
business. You can't be on the side of the person who brought you
in." And ultimately, the family lawyer has to know when to call a
time-out and advise individuals in a dispute that they each need
their own counsel.
How not to kick the hornet's nest
John Talvacchia, a corporate attorney at the Boston office of
Eckert, Seamans, Cherin & Mellott LLC, suggests telling
individual family members that situations could arise in which it's
in their best interest to seek individual counsel. Preferably, as
in many things, this should be done long before it's needed.
While it's possible to represent individual family members in
matters that do not conflict with the legal needs of the business,
the line can easily get blurred. "You are trusted," Talvacchia
says. "They're going to confide in you personal issues as well as
business issues." And some of those personal issues have the
potential to negatively impact the business. "You have to be
vigilant because you can't expect the client to be."
Take this scenario: The founder of a family business dies and the
wife takes over the business. The attorney representing the
business had had a long-term relationship with the founder. The
business falls on hard times, and its bank wants the widow to sign
a personal guaranty. It's in the interest of the company that she
sign, but not in her interest to do so. The widow signs, but the
business fails, and the bank seeks repayment from her. The attorney
for the business should have advised the widow that she should seek
Or, this one: a company decides to raise money by issuing stock. A
family member wants to buy in. The lawyer for the business should
recommend to this family member that they seek independent
He recommends drafting an engagement letter outlining who the
client is and the nature of the engagement. The letter should
include a description of the nature of the legal service for both
the company and individuals, and should recognize the potential for
a conflict. It should include wording about what steps the attorney
or firm will take in the event that conflict arises.
Insiders, outsiders and exit plans
A common problem in second-generation family businesses are
conflicts between siblings who want to stay involved in the
business and those who don't. "Often, the second generation takes
the credit for the founder's efforts, and outside siblings think
they share equally," McLaughlin says.
Situations that lead to legal discord are disputes about
compensation and about levels of involvement in the business. In
pass-through business, partners incur tax liabilities whether they
get distributions or not. The inside family members may want to
keep the distribution in the company to grow the business. "You get
this inherent conflict where those on the outside want their
distribution, at least enough to pay the tax, and hopefully receive
some ROI," he says.
Additionally, in the course of estate planning, shares in the
company given to grandchildren may push them into tax brackets that
are unexpectedly high, McLaughlin says. "The problem is, there
isn't a market for buying the grandchild's stock." He advises that
it's good to have a circuit breaker to let a family member who no
longer wants to be part of the business to get out.
David Klebanoff of Gilman, McLaughlin & Hanrahan LLP observes
the challenge of annually setting a value on company stock. In
businesses where everyone gets along, they see no need to update
the value of the stock. "A safety agreement should be that unless
value has been set within the last 24 months, the old value is
void," he says.
One preventive measure is to have the option to sell the stock at a
discount off-book value.
Family businesses should build into their legal planning the
possibility that future partners might be at loggerheads some day.
Say that two partners started a business, but now the second
generation doesn't get along. Having a buyout clause avoids the
need to dissolve the business to get out. McLaughlin warns,
however, that valuing a business is not an exact science. A
superstar performer, for example, should not have to pay a buyout
premium to an underperformer who wants to exit.
Things get more complicated when family members divorce in
businesses in which marital assets are the majority of the
business, McLaughlin notes. A founder may not want a former in-law
owning a big chunk of the business. Prenuptial agreements that
exclude inherited family assets take the business out of
consideration as a division of marital assets.
Fitting client to counsel
Family businesses can be divided into two types, says Richard
Narva, founder and senior advisor at Narva & Company. In the
family-managed model, the owner-managers seek to transfer role and
operations responsibility from the first generation to the second.
While some of these businesses can be large, they also tend to be
"lifestyle" companies -- "You work hard, you work long hours, you
try to do well, and at the end of every year, you decapitalize the
company to finance [the family's] lifestyle," he says. "It's not
often a strategic decision, it's simply an intuitive judgment made
by the major breadwinner in the business to improve the family
Family-managed businesses rarely use legal help in a proactive
way; they use it only when needed. These companies are not an
attractive market to an institutional law firm, he says -- they are
served by very small firms.
The family-controlled enterprises vest control in a family
shareholder group, which may or may not be involved in management,
but which keep control through a number of mechanisms. A trust may
hold the shares of individual members, and instead of
decapitalizing every year, the family shareholder group attempts to
grow the enterprise. This model more closely resembles any other
non-family company, and is therefore a better fit with an
institutional law firm, Narva says.
Getting two disciplines into the room
Before founding his company in 2009, Narva practiced corporate
law with a mergers and acquisition specialty before succeeding his
father as president of Morton Shoe Companies Inc. as the
third-generation head of the company. He also has a long history of
directorships in family-owned companies and has been advising
family firms since 1986. He founded a predecessor firm with a
partner in 1986, which lasted until 2005. He was then a partner in
a boutique investment bank until founding his eponymous firm in
Family-controlled firms have ownership, tax and estate planning
issues that investor-owned companies do not. And, Narva says, it's
almost never true that the lawyers doing the tax and estate
planning and the lawyers doing corporate financing speak to each
other -- even if they work in the same law firm.
In fact, he says, when he visits a client, the attorney working on
tax and insurance structures and the one advising on joint ventures
have not been put into the same room together. "Two weeks before
the closing of the deal, they talk. Sorry, it's too late," he says.
Not too late for the rudimentary things, but when the issues of
control, money or power mixed with family dynamics are added on,
"you can't close the deal."
The type of lawyer who can avoid this situation is one with the
skills to take on a leadership role -- a skill that's often learned
outside of law school, Narva says. An attorney can advise a client
on whether to take on the LLC model or the corporate model -- "a
first-year associate can do that," he says. The real issue is
integrating tax and estate advice for the shareholder control group
with the growth goals of the company. "Integrating that requires
involvement at the highest levels; lawyers are fearful of
jeopardizing their relationships," he says.
The lawyer who represents a family business has to focus on the
forest, not the trees. His or her firm has to be large enough to
offer specialties needed by the client, according to Narva, but not
so big that the client's representation will be pigeonholed, with
one specialty not knowing what the other specialty is recommending.
The family-business lawyer has to be both sensitive enough to
anticipate and recognize conflict, and objective enough to avoid
"Lawyers need to understand that in the same way that they're not
CPAs, they have to know when to call in an accountant," Narva says.
"They have to know when and [who] to call to deal with complex
family issues being acted out in the business."
Christina P. O'Neill is custom publications editor at The
Warren Group, publisher of the Massachusetts Lawyers