To the Victor Belongs the Ashes
An ace litigator explains why nobody wins a family fight over the business—and why it's smart to address money issues before the missiles fly in court.
There are people who believe that lawyers—like missiles—are very useful, but only so long as they are kept in their silos. I don’t happen to agree with that remark by the corporate raider in Other People’s Money. Sometimes disagreements in family businesses escalate to the point where litigation becomes inevitable. If both sides are determined, the case can go on for years, until the “victor” walks out on a pile of ashes.
A smart and dispassionate lawyer can do much to limit the damage of such lawsuits. One key to limiting the carnage is for the lawyers to explain to the prospective litigants at the very outset why few people ever really triumph in a fully litigated family feud. There are five independent reasons why that is so.
The first reason is that family fights are usually filled with more bitterness than ordinary commercial disputes or suits between shareholders who aren’t blood relations. It is no surprise that the Bible begins with Cain murdering Abel, followed by Abraham being perfectly willing to do in Isaac for some broader, essentially corporate purpose, followed by Jacob setting out to dupe Esau for essentially chump change. If you take the venom inherent in any family dispute and add to it the venom inherent in any litigation, you achieve a hatred normally reserved for Northern Ireland or the Balkans. The suit will end someday, but the likelihood of the litigants ever reconstituting a business, let alone a functioning family, is very small.
The second reason why nobody ever wins is that if the issues are complex enough, generally the outcome is preordained: Somebody is going to buy and somebody is going to sell. Working together in the future is no longer a realistic option.
Before the lawsuit begins in earnest, the litigants should understand that ultimately somebody is going to buy and somebody is going to sell. Better to reach that insight now than to go on and on with litigation until both sides develop battle fatigue or become wholly owned subsidiaries of their respective law firms.
The third reason nobody wins is that most family disputes are tried in state courts, where the judges have as their basic business putting people in jail for murder and mayhem, and are not really as well served by clerks and staff as are federal judges. Generally speaking, most family disputes are in state court because the family members tend to live in the same state. There is not the “diversity of citizenship” which creates federal jurisdiction. Moreover, the legal issues in family fights are fraud, breach of contract, or breach of fiduciary duty. Those are state law claims, not federal causes of action that could open the door to the federal courthouse.
There are many earnest, hard-working state court judges, and the quality of state court justice is improving as more and more good lawyers, sick of practicing law, seek positions on state court benches. That said, for the most part the state courts remain mired in criminal business and understaffed. They are not the best place to get a speedy resolution of family feuds.
The fourth reason that few people ever really win a family lawsuit is that confidential and sometimes awkward information is divulged in the course of the case. It may come out in discovery or at trial that the company pays not only for the CEO’s Cadillac but also for the Cadillac of his son, who is in his junior year at Exeter and is listed as a “consultant” to the business.
Now it is true that publicly held companies are not without their perquisites, but those perquisites tend to be more fully disclosed and somewhat less blatant than in the private company. Accordingly, if the case goes on long enough, and there is enough muckraking, after a while there are going to be three parties to the case—the plaintiff, the defendant, and the Internal Revenue Service. You can imagine who will prevail in that negotiation.
The final reason that nobody really wins a significant family fight is that both sides hire top talent to represent them. When the stakes are sufficiently high, very few people hire third-tier lawyers. That means tough, drawn-out litigation by equally chilling and equally ferocious adversaries whose work is ultimately self-canceling and prohibitively expensive. It is not entirely untrue to say that litigation has replaced polo as the Sport of Kings.
So what do I tell clients who are determined to make war? After making my point that it will be hard in the end to know who has “won,” I ask them about their war aims. If the client tells me forthrightly that the goal is vengeance or retribution, I tell the client to get another lawyer. If the client says, “I want control,” that is at least a step in the right direction. The client is telling me, in effect, that he or she would like to buy the business. We can then begin to get to the real issue: How much are you willing to pay? And, if that is your price to buy, what is your price to sell?
The best way to concentrate the client’s mind on what is real and practical is to appeal to possessive individualism. Gecco in Wall Street was right: Greed is good. When a client can focus on money, the lawyer has a commodity that is susceptible of compromise, that can be moved back and forth across the table with the other side’s lawyer.
If the litigants will agree that what they are fighting about is money, they can then begin a process of valuation: How much is this business really worth? If it is a retail business, is the land more valuable than the franchise? Is the stock more valuable than some income stream? It can be helpful for both sides to bring in experts early in the process. The experts have a better chance of talking meaningfully about valuation issues with each other than wrought-up family members or even the lawyers can. It is important to try to get that dialogue among the experts going as soon as possible.
All this does not guarantee that there will be no litigation. Conversely, it does not mean that once a complaint has been filed, there is no turning back, all is lost. Whatever path the disputants follow, whether or not the lawsuit proceeds, the sooner the parties start talking about value, the sooner the experts get involved, the sooner the dispute is likely to be resolved. When both sides can talk about money, can talk about that which is divisible, they are making real progress.
Friends of mine who are called in as psychologists, mediators, or healers to resolve family business disputes tell me that before the parties can talk rationally about money, they must first be allowed to express their feelings. They must be allowed to vent the anger, the hurt, over long-standing grievances ranging from memories of latchkey childhoods, to sexual abuse, to unpaid country club dues.
I am not persuaded that the indispensable prelude to intelligent conversation about money is a full and complete airing of unresolved Oedipal feelings or suchlike; and the rise, and rise, of therapeutics in the last quarter century is not, in my view, the most felicitous of all social phenomena. Moreover, the mediators who deal with “family systems” shift their empathies around like a pea in a shell game: It is hard to tell at any given time which family members they are purporting to coddle and where their loyalties lie. Lawyers may not be God’s Chosen, but we do know who our clients are, and we are good at keeping the focus on first things, namely money and power.
If the parties are inclined to try using a mediator, that inclination should be encouraged, but the lawyers should conspire to get the court to help. In my experience, mediation tends to work better if the court has ordered it, and sometimes better still if the parties have suffered through a small amount of litigation so they have a hint of how awful a lot of litigation can be.
Mediation works best if the judge who ordered it in the first place stays involved. It helps if at the outset the litigators are hauled before a judge who says clearly and forcefully from the bench: “Look, folks, you are being silly and self-indulgent as only the rich and neurotic can be. You are not going to use the resources of the court for your therapy or temper tantrums, and you will reach an agreement. I will see you again in 60 days and look forward to your report that the matter has been resolved. Clerk, call the next case.”
Now one lecture from the judge may not suffice. There may have to be subsequent sessions. But if the judge will stay involved, if the lawyers will remember that they are lawyers and not clients, and if the mediator is a good, honest broker, peace has a chance. There really is such a thing as judicial magic, and even the most litigious so-and-so can be brought to see reason by a judge mixing advice, charm, and menace.
One final point: Let’s suppose that the lawyers, the mediator, the judge, and/or plain old common-sense have gotten the job done. The parties have agreed that one of them is going to stay in the business and one is going to leave—but they cannot decide who is which. In that situation, the solution may be an auction. There are many different types of auctions with more or less elaborate rules, but the basic format is this: The parties agree to stay the litigation for a specified number of days. During that period, they line up their respective financing and pick a date for the auction. The auction can be a one-bid, winner-takes-all, or it can go back and forth, like an auction at Sotheby’s, with each bid upping the ante by $1,000 or $1 million.
The auction process not only tests the parties’ resolve, but forces them to decide how much money they are willing to spend—or borrow—to actually buy this particular business. Few lawyers can render their clients a better service than to persuade them to drop a lawsuit for an auction.
Jeffrey B. Rudman is a senior partner at Hale and Dorr, the Boston-based law firm. Rudman is chairman of the firm’s Securities Litigation Practice Group and specializes in securities and shareholder lawsuits. This essay was adapted from his remarks during a panel discussion at a Family Firm Institute conference in New York City.