Family fiduciary feuds: how to mitigate conflicts and manage litigation in family-owned businesses and trusts
Meghan E. Tepas &Michael D. Whitty
by Meghan E. Tepas & Michael D. Whitty
Some level of conflict is inevitable in family-owned businesses and trusts, but when both are at issue, the potential for conflict increases significantly. This article discusses the reasons for the high risk of conflict, strategies to minimise the risk of litigation, and provides critical advice to heed if conflict results in litigation.
Legal obligations
Fiduciary obligations are pivotal in both the business and trust realm. Personal family dynamics often collide with these obligations and with business necessities, resulting in conflict. Subjects ripe for conflict include: who is selected to control the family business, the level of compensation family members receive from the business, and the fairness of trust bequests and distributions. When family members assume fiduciary roles over each other, the risk is heightened that underlying tensions will boil over into litigation.
Mitigating conflicts
Trust settlors and family business owners can best mitigate the risk of conflict by proactively confronting family dynamics and including mitigation provisions in their governing documents. For example:
Estate beneficiaries and the next generation of business managers should be advised of the family succession plan. At a minimum, summaries of the governing documents should be provided.
Consider including safe harbour clauses, fiduciary exculpation, the prudent investor and business judgment rule, and separate classes of voting and non-voting stock.
Neutrals, like a corporate or professional trustee, should be considered over family members in fiduciary roles. Alternatively, a special business trustee or a trust protector could serve alongside a family fiduciary.
Procedures for pre-litigation resolution, such as mediation, arbitration, or “baseball arbitration”, should be spelled out.
Including fee-shifting, indemnification, surcharge, and (in states where they are valid), in terrorem provisions can disincentivise litigation through added cost.
When litigation arises
Even the best planning cannot guarantee a dispute will not enter litigation. In the event a lawsuit looks imminent, the following early actions are critical:
Retain litigation counsel: Relying on corporate counsel who drafted the documents at issue is ill-advised because they may be necessary witnesses, and because doing so risks waiving attorney client privilege, particularly in states that have adopted the fiduciary exception.
Identify representation, avoid conflicts of interest: Engaging a single attorney to represent multiple family members is risky, given the likelihood that interests that begin aligned may later diverge.
Set expectations: Recognise that litigation is costly and will expose otherwise private family matters, including finances and personal squabbles, to public scrutiny.
Identify deadlines: Some critical fiduciary causes of action must be brought within 6 months or may be waived.
By anticipating conflicts and adopting proactive measures through estate and business succession planning, families may reduce the risk that conflict escalates into courtroom battles. And when litigation looks possible, consulting a litigator is vital to effectively navigate the complexities of fiduciary conflicts.
Read the full version of the article here.
SGR is a full-service, international law firm with 14 domestic and international offices that advises regional, national, and global businesses on a wide range of legal matters. The firm’s nearly 400 attorneys provide legal counsel in more than 50 specialised practice areas, including corporate transactions, litigation, intellectual property, aviation, banking, real estate, insurance/reinsurance, construction, employment law, international law, employee benefits, and executive compensation.
GGI member firmSmith, Gambrell & Russell, LLP (SGR)Chicago, IL,USAT: +1 217 535 1060Law Firm Services
Meghan E. Tepas is a partner in the litigation and fiduciary disputes practice of Smith, Gambrell & Russell, LLP. She is a litigator, and practises in state and federal courts across the US. Her client base is focused on closely-held and family-owned businesses, individual beneficiaries, and individual and corporate trustees. Contact Meghan.
Michael D. Whitty is a partner in the corporate practice of Smith, Gambrell & Russell, LLP. He concentrates his practice in estate planning, taxation, and estate and trust administration. He represents high net worth individuals in planning for the preservation and transfer of their wealth. Contact Michael.
