Family Business Center Director Blog: Keeping the Family Out of Court

11.28.2010 Article, General, School News

Keeping the Family Out of Court: Alternative Dispute Resolution (ADR) and the Family Business
reposted from
Posted by Kathy Baker on October 29, 2010 at 1:09pm

Over dinner recently, several members of the Wake Forest University Family Business Center and I were introduced to the concept of ADR by Judge Ben Tennille, Chief Judge of the North Carolina Business Court. A little background here: In January of 1996 Judge Tennille was sworn in as the first Special Superior Court Judge for Complex Business Cases in North Carolina and charged with creating the first state-wide Business Court in the nation. Today, all cases involving complex and significant issues of corporate and commercial law in our state are assigned to the Business Court, where a special superior court judge oversees resolution of all matters in the case through trial.

Back at dinner, Judge Tennille expressed dismay at the number family-owned business owners that appear in his court, and concern that the legal process does not serve these companies well.

Family members come to court hoping the judge will be able to solve their disputes (and, of course, rule in their favor). But, according to Judge Tennille, the judge actually has very little discretion in these cases. Often the only choice available under the statute is to rule for dissolution of the business. This is typically not the preferred result for the business owners. After consulting their tax advisors, they realize it is a very unappealing and prohibitively expensive option.

After months of preparing for litigation, and thousands – if not hundreds of thousands – of dollars spent, the principals find that it is still up to them to resolve their dispute. Oftentimes, the underlying reasons behind the lawsuits are things that have little to do with the business operation.

Unfortunately, the legal system has no mechanism to slow the rush to litigation once it has started. Once one party has decided to sue, direct communication between the family members often ends. The lawyers are doing their jobs, advocating for the individual interests of their clients. Unfortunately, the collective interests of the family and the company — its customers, employees, and suppliers — are overlooked in the process.

Family businesses are at their best when the interests of the family members and their business are aligned. A divisive lawsuit is heartbreaking for the family and a real drain on the productivity and profitability of the business.

Family business owners usually want to keep information about their business operations private. A lawsuit opens up the family relationships and business dealings for public scrutiny, which is a very painful development for most family business owners. As I was preparing to write this article, I looked at the current issue of Family Business magazine and read about the Rollins family of Atlanta, Georgia. The family and family business had always kept a low profile, until the death of the family matriarch precipitated changes that led to unrest and discord among family members. The current lawsuit, filed by children against their father, seems to be an unlikely outcome for this family – but unfortunately is an all too common result.

In our litigious society, the road less traveled seems to be one involving Alternative Dispute Resolution (ADR). ADR provides an avenue for the parties to talk about their dispute with a facilitator or mediator, and to resolve their differences before pursuing legal action. At the very least, the parties can be made aware of the expected costs of litigation and get a realistic view of the ability of a court to resolve their dispute.

An opportunity to talk things through could also be an important step in diffusing and de-escalating a disagreement that is otherwise on the road to the courthouse. This is an area where the member companies of a local Family Business Center program may be of service. A business owner may be more receptive to peer advice from a fellow family business owner than an officially-designated “mediator” in the early stages.

A more proactive step would be to include language in the shareholder or partnership agreement to mandate that in the event of a dispute ADR will be pursued as a first option. This part of the shareholder agreement can act as a kind of “pre-nup” for owners – creating an opportunity for a conversation on how future disputes will be resolved while times are good and relationships are trusting and friendly.

The inclusion of an ADR mechanism in the shareholder agreement also provides a great educational opportunity for future shareholders. A presentation and discussion of the purpose of the ADR provision could be a natural addition to any family council meeting. Again, the resources of the local Family Business Center could be brought to bear in crafting appropriate language, as well as in providing a slate of potential mediators from the member companies, and from business and law school faculty members.

The Wake Forest University Family Business Center is currently working with Judge Tennille and faculty members involved with our Community Business and Law Clinic to develop recommended language for inclusion in the shareholder agreement. I will keep you posted on our progress and welcome comments and suggestions on this idea.