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Family business disputes frequently about control, direction

2018-10-29

Marlin Horst head shot

It can be difficult for family business partners to keep emotions separate from management and operations, particularly when one generation is passing control off to the next, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

“Family business disputes are not as uncommon as people think, especially when you have a strong founder passing off an empire to the next generation,” says Horst, a partner with Shibley Righton LLP.

Earlier this month, an Ontario business magnate and his wife launched a lawsuit claiming their daughter, two grandchildren and others are allegedly mismanaging the family's assets and trust funds. The Canadian Press reports the suit, which has not been proven in court, seeks more than $500 million in damages.

In their statement of claim, the parents accuse their daughter and others of allegedly "having undertaken a series of covert and unlawful actions" that have been contrary to the best interests of other family members. As well, they claim their daughter led an extravagant lifestyle that has allegedly drained the company in excess of $70 million.

His daughter has denied the allegations stating, “Family relationships within a business can be challenging. My children and I love my father. However, his allegations are untrue and we will be responding formally to the statement of claim in the normal course of the court process,” the newswire reports.

Horst says a common point of friction in some companies is when elders back out to let the next generation run the family business.

“Sometimes they want to retire and pass off the day-to-day operations to their children. They step away, but they don't like what they see. It’s not so much that the younger family members are bad managers, it's just that they're taking the company in a different direction,” he says.

By stepping back, a founder of a family business may also be faced with a decrease in control — something they may never have experienced before.

“When transferring a family business to children and other family members, estate freezes are done, family trusts are set up, and it’s structured in such a way that the next generation has more control than they did before,” Horst says. “This can lead to conflict, power struggles and disputes overspending, for example.”

When family members fight over the direction or control of a company, it's a much different dynamic than it would be between unrelated business partners, he says.

“Even though the parties are adults, it can come back to dynamics like, ‘Dad always loved you best.’ These issues generally have nothing to do with the way the business is being run."

For example, Marlin points to the statement of the claim where the plaintiff says his daughter doesn't treat him with the respect he deserves.

"That's not a legal issue — that's a family issue,” he notes.

Horst, who was not involved in the matter and comments generally, says these types of family business typically don’t end up in court.

“Oftentimes, family members are willing to come to some kind of agreement to avoid the expense and public nature of litigation,” he says. “Occasionally there are people who have no interest in compromising and are willing to go down the road — despite the cost and unfavourable optics.”

The magnate said in a statement that he and his wife have made "considerable efforts" over the last two years to resolve the matter and filed the lawsuit as a last resort.

 

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2018-10-29