Consider this situation. Three brothers inherit the family farm in the mid-1970s and grow it over a period of time. Each of the brothers gets married and has children. Some of the children participate actively in the business, some do not.
As the decades roll by, the brothers share in the highs and the lows, and for the most part, each contributes to the farm business. Over a period of time, however, one of the brothers sees a need to diversify and is always looking for additional opportunities. He then starts spending a significant amount of his time and energy pursuing opportunities that are not strictly relating to the core farm business.
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These other opportunities do not materialize, at least not in the short term, and this creates a significant amount of frustration for the other brothers (who are naturally more risk-averse) although nothing is said by the two other brothers except to each other as these other opportunities are being explored.
On top of that, the eldest brother is seven years older than the next older brother and has had some health issues that have made him reassess his contribution to the farm business. Now, he wants to scale back his involvement, and although he has a son and daughter who help out in the business from time to time, they aren’t involved full time nor are they prepared to be, so a transition to them is not an option.
This brother would not mind the other brothers buying out his interest, but they are very far apart on what each feels that interest is worth. The oldest brother feels that the other two are being opportunistic because the succession to his children is not a realistic option for him, as it is for the other two, and the success of the farm has, according to him, in no small part been as a result of his sweat equity and acumen over the last 20 to 30 years. He now feels stuck.
Not surprisingly, no partnership or shareholders agreement was ever entered into when they inherited the farm. Each of the brothers now talks very little with the others.
What to do?
This is a difficult situation. Hard feelings have developed over time and the chances of a situation like this resolving itself amicably do not seem very high. The worst-case scenario is litigation or even a forced unwinding of the farm business. Families being what they are, the hard feelings between the brothers have the potential to extend to the children as well.
Such an outcome, although not uncommon, is very unfortunate, particularly because some of these issues might have been avoided had the brothers gone through the process and entered into a partnership, shareholders or joint venture agreement to govern their relationship as it relates to the farm business.
These types of agreements will have clauses that can establish a mechanism to allow one partner or shareholder to leave in an orderly manner and should contain a mechanism to establish a fair value. In addition, the agreements should contain restrictions on what the brothers can and cannot do in the farm business.
Such an agreement should also address how they will keep the business running if more funds are required, and it should establish parameters about how decisions will be made, including the kinds of decisions required on a day-to-day basis as well as on a more fundamental or strategic basis, such as an expansion of the farm business.
If any of the provisions of the agreement are breached or if the brothers reach an impasse in their relationship, there is recourse and there are mechanisms to address most situations.
Perhaps the more important result is that if the brothers are properly engaged at the beginning of the process, they will be forced to address and manage the expectations about what each will contribute to the farm business and what each will expect from the others. Unless specific scenarios are presented to them, the parties involved may either have different ideas of what they and others are or are not required or expected to do, or they may simply not turn their minds to some of these particular issues. This could involve setting out specific requirements, job descriptions, compensation, entitlements such as vacation, etc
Going through the process at the start means decisions are made and parameters are set on a more objective basis rather than trying to resolve the issue once people are justifying actions they have already taken.
It is wise to consider a periodic review of such provisions to allow the specific requirements, job descriptions, compensation and entitlements to evolve as the farm business evolves.
Such a process significantly limits the potential for conflict because all of the parties are clear on their obligations and on the expectations of themselves and the others going forward.
Had our three brothers engaged in this process, the likely result would be that the approval of all of the brothers would have been necessary to allow one of them to pursue other opportunities. Whether or not the opportunity succeeds, all of the brothers are part of the process and decision making and this limits the potential for conflict between them.
Also, with a properly prepared agreement, the eldest brother does not have to negotiate with the others about the value of his interest because a method and formula of valuation may have already been agreed to by all of the brothers. Even with a typical “shotgun” clause, there is still a mechanism that forces the brothers to be commercially reasonable, and avoids, or at least minimizes, the forced negotiations where the brothers are all directly adverse in interest at that point in time.
Ultimately, the benefit of these types of agreements include both that you have a farm business which has parameters to allow it to run more efficiently, and you minimize the potential for disputes and conflict within the extended family.CG
Elmer J. Gomes is a business lawyer at Thompson Dorfman Sweatman LLP and advises clients ranging from family run businesses to public corporations on all aspects of their business needs. He co-chairs the firm’s Agri-Buisness Industry Group and can be contacted at [email protected].
