The Family Business Guide:
Everything You Need to Know
to Manage Your Business from
Legal Planning to Business Strategies
By Frederick D. Lipman
Palgrave Macmillan, 2010
304 pp., $65
In the family business realm, few circumstances are as heartbreaking as an intrafamily lawsuit. In his new book, Frederick Lipman, a Philadelphia-based partner in the law firm of Blank Rome, identifies potential breeding grounds for legal strife and proposes ways to prevent this tragic fate. (Full disclosure: I will be moderating a Blank Rome program featuring Lipman in October.)
In a fascinating chapter entitled “Worst Practices: What We Can Learn from Family Disasters”—identified by Lipman as potentially the most valuable—the author reviews U.S. court cases involving family businesses and analyzes how the litigation could have been avoided. In Rosenthal v. Rosenthal et al., which occurred in the Supreme Judicial Court of Maine, for example, patriarch Lewis Rosenthal gave each of his sons a 50% interest in a family business, Bo-ed Inc., which owned and operated a Holiday Inn. When a disagreement arose over policies on reinvestment and distribution of profits, “A wise tiebreaker could have found a way to separate the brothers in a fashion that would have prevented litigation,” Lipman writes.
Other chapters (some co-authored with other Blank Rome attorneys) discuss matters such as succession, family employee and shareholder agreements, compensation, phantom equity incentives, minority shareholders, intergenerational wealth transfer and initial public offerings.
Each chapter in this extensively referenced volume identifies “best practices” (example: “Family members should neither be overpaid nor underpaid. Instead, they should be paid a fair arm’s-length compensation.”) and “worst practices” (e.g., “Fail to create an atmosphere of trust within the family, particularly with respect to inactive shareholders.”). Sample legal documents—a prenuptial agreement, an irrevocable spendthrift trust document, a phantom stock agreement and a stock option plan—are provided as appendices.
Lipman suggests that conventional family business wisdom should not be adhered to in all instances. He writes, for example, that “openly discussing succession is not necessarily appropriate for every business,” such as when already strained family relationships might be worsened if the founder’s succession plans were revealed. Lipman also asserts: “The author does not believe that a family council should automatically be established for every business.… Owners should permit grievances to be aired by individual family members, but privately instead of in a room full of relatives.”
The book’s first appendix is an excerpt from a 2008 speech by Philip Clemens, chairman and CEO of Clemens Family Corp. of Hatfield, Pa., founded in 1895. Clemens offers his thoughts on sustaining a family firm and describes governance structures and policies in his company, which has more than 200 family shareholders. His real-world perspective offers an excellent parallel to Lipman’s legal analysis.