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Avoiding Intergenerational Fights

Many small company owners think they are doing the right thing by planning for the “orderly transition” of ownership from one generation to the next.  Often done on the advice of an estate planning attorney, the sole owner for a generation or more often outright gifts his shares to his children.

If you intend to leave the company without having any further rights, ceding total control to your children, then there may be little downside to this approach.  But all too often that is not the owner’s true intent.  Your goal may range from remaining fully in charge, to staying on as a paid consultant, to simply receiving the pension that you know you deserve.  But, once you give up control – even if your children pay nothing for the shares – you cannot simply get them back.

Clients are often bewildered that their children would fire them – put them “out to pasture,” as one client put it – after all the parents had given to them, including the company itself.  Worse is the client who believes the court will let him simply take the stock back once the judge sees what his ungrateful children have done.  Perhaps a claim may be made that there was fraud in the inducement – a promise by your children that they would do something that they failed to do, which caused you to give them the shares in the first place.

If such fraud existed, you may be able to prevail, after a lengthy and expensive litigation, on an action to reclaim your shares.  Unfortunately, even when such fraudulent statements actually were made, they usually were oral rather than written, and can often be quite difficult to prove.

The best way around the “ungrateful child” problem is to enter into a binding agreement (before you give away the company, of course) regarding anything that you expect to occur once you transfer your shares.  To buttress your rights in such a transaction, it may make sense to retain at least one share, which would entitle you to the protections afforded to a minority shareholder (addressed in archived articles).  That way, even if something occurred that was not anticipated, and could not have been addressed by way of agreement beforehand, you would still have some limited protection.

As is almost always the case, the best way to protect yourself in such a situation is to treat the transaction as you would any other business transaction, despite the fact that family is on the other side.  “Corporate divorces,” as shareholder oppression cases are by nature, often involve family members who never in their wildest dreams ever imagined they would be litigating against a relative.  An unresolved issue that went unarticulated in the family relationship often rears its ugly head in a business context once the longstanding dynamics of that business change.  The son who feels his brother was always the “favorite” now has his chance to “get even” with dad; the daughter who feels that the women in the family were never treated with the respect they deserve now can show her parents who the smart one really is.

The best way to ensure that this will happen to you is to assume it will not; instead, take the steps necessary to protect yourself from the consequences of your own generous decision.