In closely held or family-owned businesses, there are 2-3 “musts” that attorneys should counsel their clients to pursue.
There are:
At least one “independent” director to serve on the Board of Directors (or on a separate Board of Advisors);
A Succession Plan; and
Shareholder Agreement or Buy-Sell Agreement.
This article will address numbers 1 and 2 since I addressed number 3 in our last blog.
How often has a trusted business counselor heard a client say “Oh yes, we made a decision on that … we talked about it at the hockey game last night.” Things tend to get a little lax with closely held businesses. That being said, there should still be certain basic corporate formalities followed to validate company actions.
Independent board members bring a diverse perspective and augments the Company’s knowledge base with his or her own expertise and experience. These are often veterans who have “been there, done that” or have “seen everything.” Used wisely, they can be invaluable.
As much as it is difficult for small businesses – especially family owned businesses – to think about turnover or unforeseen changes, it is best to do proactive planning when it’s not needed. Proper planning provides a smooth transition in case of unanticipated departures or other change in circumstances. Owners need to construct a business succession plan that can be fluid, depending on changes in owners’ economic needs, skillsets, health status, and career objectives. Since family members can heighten any potential for conflicts, it is best for the counselor to design the succession plan through probing with many questions and a detailed analysis. Once counsel has performed due diligence and gathered all the information on the owners and reviewed the company books and records, counsel often advises for a third party confidential valuation of the business. This is important to understand the true value of ownership and the business’ tangible assets.
Counsel should help clients establish the mechanisms that address disruptions, like the untimely death of an executive officer or flood of a building or other material event which affects a business. Lastly, counsel can review the banking and loan facilities, leases, employment agreements, insurance, or any other documents that may have triggers upon changes of control, so that succession planning can be addressed before a problem arises.
Michael C. Carroll, Esq., Managing Partner, CorpGen Counsel brings a wealth of securities, governance, M&A, private equity, real estate, transactional, and general corporate law experience to public companies, privately-held companies, private equity firms, and individual clients. Mr. Carroll was previously Senior Vice President, Chief Compliance Officer, and General Counsel of Medallion Financial Corp., a NASDAQ-traded commercial lender and FDIC-insured bank, and was Senior Counsel of Aames Investment Corporation, a NYSE-traded real estate investment trust. Prior to his in-house positions, he practiced in the corporate law department of the international Am Law 50 law firm of Willkie Farr Gallagher, LLP in New York.