Starting a business with your family or friends can be a dream come true. You are your own boss and control your own destiny. While most of these relationships result in long-lasting and prosperous businesses, some do not. Having handled business disputes throughout the country, there are some common themes that ultimately result in litigation between the family business owners.
One theme to highlight from my experience is failing to follow governing documents to control how the business is run often results in disputes. So does a failure to *have* governing documents but that is a post for another day. The Minnesota Court of Appeals recently addressed a case involving a family-owned business that had internal governing documents but did not follow them which resulted in the three owner brothers embroiled in contentious litigation. The opinion can be found here.
The case involved a Wayzata, Minnesota car wash business that had been owned and managed by three brothers for decades. While the business had formal corporate documents, the brothers did not regularly follow the same and the lack of proper recordkeeping created tension between the family factions. The brothers also disagreed on the best way to manage and finance the business – one side wanted to utilize debt to obtain capital and the other faction wanted to utilize the company’s income for improvements. Over one of the brother’s objections, the business obtained a significant loan. The objecting brother and his wife were ultimately terminated as employees by the company.
The District Court, and subsequently the Court of Appeals, held that the brother who was terminated had a reasonable expectation of continued employment, income, and access to the business financial records. Both Courts also held that the primary motivation for terminating the brother was to make it easier for the other brothers to run the business. Ultimately, the District Court ordered the terminated brother’s interests in the business be bought out for nearly $3,000,000.00 which had to be paid in cash within 60-days of the order. The Court of Appeals held that this substantial buy-out and quick turnaround were lawful.
After many years of litigation, most likely significant emotional stress and undoubtedly broken family relationships, the case highlights the need for businesses to follow their governing documents. These internal documents are meant to try and help minimize potential disputes
between owners. When such documents are not followed, or not in place at all, rift arises and usually results in litigation.
Having handled such disputes in Minnesota, Wisconsin and Iowa, we can help guide you or your business on what your internal governing documents permit or prohibit to ensure you/your business is in compliance with the same. And if your rights as an owner have been violated, you need someone who will fiercely advocate on your behalf. We are that advocate.