A NEW YORK LAW JOURNAL SPECIAL SECTION

Litigation WWW. NYLJ.COM MONDAY, MAY 6, 2013 Five Commandments Of Family-Owned Business Divorce

an assassin hired by Patrizia and she was BY JOHN R. GOLDMAN sentenced to 29 years in prison.5 AND BELINDA G. SCHWARTZ As the foregoing “ripped from the head- n a fit of rage, a man hurls a cell phone lines” events illustrate, family-owned busi- at his grandson, violently striking him in ness disputes contain all of the hallmarks I the chest.1 An elderly woman prepares of a compelling melodrama: greed, envy, to flee the country to prevent her daughter long-simmering rivalries, vengeance. It from managing a cent of her multi-billion is shocking, then, that although family- dollar fortune.2 A man shoots his brother to owned businesses account for 90 percent death at point blank range. He then turns the of all businesses in the United States,6 only gun on himself.3 Apparently quite displeased 29 percent of family firms have adopted with the way his uncle was treating him and procedures for resolving conflicts between running the family’s well-known diner, a New family members.7 Jersey man was recently charged with “put- The consequences of intra-family battles ting out a hit” on his uncle (and allegedly can be utterly disastrous. Often the combat- directing the hitman to torture the uncle ants are siblings who fight after the family before killing him).4 patriarch or matriarch dies. The business No, these are not storylines from a often involves valuable real estate. The scripted drama. These events played out assets of the enterprise are usually signifi- on the real life stage and were the direct cant, but can be dissipated rapidly if the result of family-owned business disputes parties litigate the matter emotionally and that spiraled out of control. Take the Gucci without regard for reasonable business judg- family, for instance. Maurizio Gucci, who ment, which happens frequently. In family inherited half of the family business after business divorces, the parties have known his father died in 1983, was forced to sell each other for their entire lives and there- his shares in the family business after fore have more ammunition, much of which repeated losses, thus depriving his chil- includes or implicates the parent whose

dren of any inheritance and angering his death opened the floodgates of discord. BIGSTOCK,NYLJ ex-wife Patrizia. The result? In a sequence All of this makes for some very interesting of events befitting a tragic Italian opera, cases in the business divorce arena. This Maurizio was murdered at the hands of area of the law is constantly evolving and growing, especially in New York. Success- fully navigating this quagmire, especially in a very trusted confidante. It is challenging JOHN R. GOLDMAN and BELINDA G. SCHWARTZ are partners the family-owned business divorce context, work. Allow the following five command- at Herrick, Feinstein, where they are members of the litiga- requires a multitude of talents. A good busi- ments to be your guide. tion and real estate departments, respectively. SHARON O’SHAUGHNESSY, an associate, assisted in the preparation ness divorce lawyer must be an excellent Commandment 1: Understand the of this article. litigator, negotiator, and psychologist, and unique challenges that are inherent to MONDAY, MAY 6, 2013

the family-owned business structure. five causes of destructive family business be more successful, but they want to Navigating the complexities of the cutthroat conflicts: compensation, competitiveness, succeed in a way completely different corporate world is a demanding undertaking control, confusion, and carry-over.10 Since from their fathers’ way. Daughters who in and of itself, and this Herculean task is the root of conflict in family-owned busi- love their mothers and happily turn to further complicated when workplace values nesses usually has more to do with the them for personal advice refuse to be and family values intersect. The subjective breakdown of personal relationships than identified with their mothers’ manners, expectations that individuals have of their with any insurmountable disagreement con- traditions and values when it comes family members—to be unconditionally sup- cerning business matters, it is essential that to business. Such competitive con- portive, nurturing, and understanding—do business divorce lawyers understand the flicts open gulfs between siblings and not comport with the objective business psychology behind these disputes in order between parents and children that may goals of maximizing efficiency and focusing to provide the best possible representation over time, if they’re left untreated, be on the “bottom line.” This tension creates a to their clients. impossible to bridge. host of problems that are unique to family- Control: There are many reasons why owned businesses. the senior generation in a family business First, meritocratic principles are often Meritocratic principles are of- may not cede control to younger members abandoned in favor of an egalitarian busi- of the family. In some cases, parents may ness model, which can lead to inefficient ten abandoned in favor of an not trust their children’s abilities to run corporate governance and deep-seated egalitarian business model, which the business competently. In other cases, familial resentments. can lead to inefficient corporate parents may thwart any true succession Second, emotional issues in a family governance and deep-seated fa- from taking place because they are sim- system often influence decision-making ply unwilling to relinquish control, even in a business system. Professor Benjamin milial resentments. when their vision, ideas, and management Means focuses his legal scholarship on fam- styles have gone stale, thereby prevent- ily business systems and explains the role Compensation: As Dr. Thomas D. Davi- ing younger members of the family from of social identity theory in this context: dow, psychologist and family business con- working their way up to leadership roles. [W]e find our way in different social envi- sultant, explains: This lack of autonomy can be so stifling ronments by relying upon roles that help Money—attitudes towards it and behav- for younger members of the business that us to define our place and our respon- ior surrounding it—is often the symp- they walk away for good, thus ensuring the sibilities. For most of us, our workplace tom of family members’ discomfort and eventual collapse of the entire enterprise. identity is very different from the role almost always represents underlying Confusion: Lea contends that “[c]onflict that we play in family life. But in a fam- issues that exist within the family sys- is born of confusion when there is a failure ily business, role separation becomes tem. Money and how it is treated within of communication, or a reluctance to intro- more difficult…. The expectations that the family system can send messages of duce and abide by systematic management we have of members of our family—that fairness or lack thereof, disappointment, processes, or a lack of transparency in the we put the family’s interests first, that unfulfilled expectations, acceptance, way the business is run and the reasons for we take care of each other—may conflict love and the most powerful negative running it that way.” When there is a lack of with the goal of maximizing economic message—rejection.11 certainty as it pertains to job duties, expec- return in a business. To the extent social Compensation-based conflict takes on tations, and aspirations for the future, a total roles are incompatible, family business many forms, such as disputes over actual breakdown of communication occurs and has a built-in conflict.8 or perceived salary inequities and squabbles the resulting assumptions are toxic to the Third, many family-owned businesses do over who has the power to make compensa- business atmosphere and the interpersonal not have business succession plans in place. tion decisions. The one common denomi- relations of family members. In fact, roughly 30 percent of family-owned nator, however, is that these disputes are Carry-over: Carry-over conflict arises businesses survive into the second genera- a destabilizing force that wreaks absolute when family members do not forgive past tion, only 12 percent are still viable into the havoc on family businesses. transgressions. Instead of viewing one third generation, and a mere 3 percent of all Competitiveness: While it comes as no another as equals, these family mem- family businesses operate into the fourth surprise that sibling rivalries run rampant bers view each other through a static generation or beyond.9 This lack of plan- in the family business landscape, an oft- lens and perceptions become locked in ning and foresight can result in a veritable overlooked form of competitiveness exists time. For example, sometimes even the field day when power is up for grabs and between generations and has the potential most prudent and successful business often culminates in the ultimate destruc- to be catastrophic to the fiber of the family. person can be unable to forgive a family tion of the business. This area is thus rife According to Lea: member for mean-spirited comments that with litigation. It’s natural for children to try to model were made decades ago, thus sparking Commandment 2: Develop a solid grasp themselves after their parents and also an ongoing, emotionally-fueled grudge of the most common causes of family to try very hard to differentiate them- match. This creates a perpetual cycle of business conflicts. Learn “the 5 C’s.” Dr. selves from their parents. Sons want conflict that is psychologically and emo- James W. Lea has identified the following to succeed like their fathers, even to tionally exhausting. MONDAY, MAY 6, 2013

Commandment 3: Be acutely aware of permanently damage the relationship. After by angry family members who typically the emotional and interpersonal dynam- confirming that your client understands the have enough wealth to tell their lawyers ics at play. As litigators, our focus is gen- potential lifelong ramifications of pursuing “I’m already rich so do it my way (or I’ll erally across the aisle (or, in the case of a this route, the central inquiry is: “How much find someone else who will) and I don’t negotiation, across the table) because, as money are you willing to pay to punish and really care if it diminishes the value of our zealous advocates, we want to outwit and aggravate your family member?” While this assets as long as it hurts my idiot brother.” outsmart the opposition so that we may gain notion may be offensive to some, the stark A truly skilled business divorce lawyer finds the best tactical advantage for our client. reality is that certain people do not want to a way to manage this tricky dynamic. Basic However, when representing a party that keep family ties intact, and it is our duty as reverse psychology can be very effective. is embroiled in a family-owned business attorneys to provide effective representation Telling a wealthy business divorce combat- divorce, it is imperative to pay close atten- for our clients, up to and including full-scale, ant that he or she must do something intel- tion to what is happening on your side of five-alarm, scorched earth litigation. ligent—and not emotional—doesn’t usually the room. It should be noted, however, that courts go so well. Suggesting, however, that it’s In this context, the lawyer must analyze can be especially sensitive to tactics okay to do something dumb sometimes the issues from a professional perspective employed in scorched earth litigation that causes the person to do the smart thing and through an empathetic lens. This is a involves familial relationships. For example, (and protect the assets of the business). delicate balance to achieve. To this end, it Ronald Perelman, a billionaire, was engaged Conclusion is absolutely crucial to unearth the impetus in a dispute with his ex-wife’s family, whose for your client’s positions. What emotional large family business, Hudson Media, is An effective business divorce lawyer is stage is your client experiencing with regard known for newspaper and magazine distri- thoughtfully proactive, not reactive, and to the business divorce? Blaming the oth- bution. In a “rare and stinging rebuke,” a New most importantly understands—and pays er party? Denial? Mourning the loss of the Jersey judge sanctioned two law firms for attention to—the unique family psychologi- business? Anger? Bargaining? Depression? improper conduct during the litigation. More cal dynamic that drives these cases. A combination of the above? How do these specifically, Perelman attempted to have his ••••••••••••••••••••••••••••• emotions color your client’s demands and father-in-law declared incompetent, and the 1. Murray v. Murray, C067466, 2011 WL 5326293, at *3 (Cal. inform your client’s worldview? Business judge in the case characterized Perelman’s Ct. App. Nov. 7, 2011). 2. “Court Rules L’Oreal Heiress Liliane Bettencourt Unfit divorce lawyers should be cognizant of the attorneys’ cross-examination of the father- to Run Affairs,” Radio France Internationale (Oct. 17, 2011), fact that these emotional states are fluid. in-law as “harsh” and “painful.” The judge http://www.english.rfi.fr/france/20111017-court-rules-loreal- heiress-liliane-bettencourt-unfit-run-affairs. Your client’s perception of family relation- then ordered astronomical sanctions that 3. “Murder-Suicide Over Business Dispute: Cops,” NBC ships may shift and permutate on a daily, could potentially range in the millions.12 Connecticut (Oct. 8, 2012), http://www.nbcconnecticut. com/news/local/Police-Investigate-Homicide-in-New-Hav- or sometimes even hourly, basis. At the other end of the spectrum lies the en-173110741.html. The effectiveness of your representation strategy of negotiating a business agreement 4. “Diner Manager Accused of Trying to Have Uncle Killed,” The New York Times (April 10, 2013), http://www.ny- in a family-owned business divorce hinges in an atmosphere that is devoid of all emo- times.com/2013/04/11/nyregion/manager-of-tick-tock-diner- on your ability to manage your client’s tion. The main focus of this strategy is devel- held-in-murder-conspiracy.html?_r=0. 5. Alessandra Stanley, “Former Wife Given 29 Years for Or- emotions and expectations throughout the oping a plan to achieve an efficient result dering Gucci Slaying,” The New York Times (Nov. 4, 1998), representation, and this often requires you whereby the parties resolve their business http://www.nytimes.com/1998/11/04/world/former-wife-giv- en-29-years-for-ordering-gucci-slaying.html?src=pm. to keep a closer eye on your client than issues while maintaining positive, productive 6. 5 Tips for Managing a Successful Family Business, U.S. your adversary. family relationships. Negotiation grants the Small Business Administration (May 31, 2011), http://www. sba.gov/community/blogs/community-blogs/small-busi- Commandment 4: When formulating parties autonomy to craft a resolution that ness-matters/5-tips-managing-successful-family-business. a legal strategy, it is imperative to deter- both sides can live with, and another upside 7. According to a 2012 sample survey conducted by PwC. Family Business Survey2012: Falling Out and Making Up, mine whether your client has any desire of this approach is that it allows for relief PWC, http://www.pwc.com/gx/en/pwc-family-business-sur- to salvage the familial relationship. The that a court simply cannot order. A key to vey/conflict-resolution.jhtml (last visited April 10, 2013). 8. Benjamin Means, “The Relational Structure of Family reality is that, all too often, intra-family rival- the success of this approach is to employ Businesses,” The Legal Workshop: William & Mary Law Re- ries, feuds, jealousy, selfishness, and greed a skilled intermediary who is sincere and view (Feb. 22, 2013), http://legalworkshop.org/2013/02/22/ the-relational-structure-of-family-businesses. are simply insurmountable. An essential credible with both sides. 9. Succession Planning, Family Business Institute, http:// inquiry for any attorney representing a party Commandment 5: Focus on the “chil- www.familybusinessinstitute.com/index.php/Succession- Planning/ (last visited April 10, 2013). in a family-owned business divorce case is dren.” In the family-owned business 10. James Lea, Ph.D., “The Causes and Cures of Five De- whether your client wants to salvage the divorce context, the “children” are the structive Family Business Conflicts” (2006). 11. Thomas D. Davidow, “It Is Never About the Money,” familial relationship or whether the relation- entity’s buildings, assets, corporations, and Tarlow Breed Hart & Rodgers, P.C. (Sept. 10, 2010), http:// ship has been irreparably damaged and your subsidiaries. Effective advocacy in the busi- www.ourfamilybusinessatodds.com/it-is-never-about-the- money/. client is out for blood. The answer to this ness divorce context involves progressive 12. James Bandler, “Judge Deals Ronald Perelman An- question often dictates the legal strategy thinking about how to leverage the children other Blow,” CNNMoney (June 16, 2010), http://money.cnn. com/2010/06/15/news/ronald_perelman_legal.fortune/index. that is employed: full-scale litigation warfare to your client’s advantage. htm. or negotiation. This can cause some difficult encounters

In the litigation context, there is a “win- between attorney and client. In many— Reprinted with permission from the May 6, 2013 edition of the NEW YORK LAW ner” and a “loser,” which has the potential to indeed most—business divorces, the “best JOURNAL © 2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257- exacerbate family rifts and, in many cases, interests of the children” are overlooked 3382 or [email protected]. # 070-05-13-17