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How ADR can help with family businesses

Focus on Alternative Dispute Resolution
|Written By Dale Smith
How ADR can help with family businesses
David Lees says that by using an ADR process, it keeps a matter private and allows more creativity than a court process would allow.

As baby boomers start retiring, disputes are arising within family businesses as to who will take over once the parents retire. Lawyers and alternative dispute resolution professionals say that mediation can help reduce conflict and ultimately salvage relationships in these situations.

“There is so much wealth being passed on between the baby boomers and their descendants; this is a very common problem,” says Paul Iacono, president of YorkStreet Dispute Resolution Group Inc. in Toronto, a former litigator who has been practising ADR since the 1990s.

Iacono says a common situation is a business started by brothers or sisters and, as they all reach retirement age, their next generation isn’t getting along with one another.

“When the adults are there, supervising the children, everything is fine,” says Iacono.

“With the next generation, one group thinks they’re smarter than the other group and wants to go in different directions. In order to keep peace in the family, the best solution is to put a value on the business and break it up into its component parts. In order to do that, you need good facilitators.”

Iacono says these facilitators need to have the training to reduce conflict and let it be known that, if they go into litigation, the parties can destroy the business as well as their family relationship.

As well, if they do reach litigation, they tend to be spending money that belongs to the estate or the business.

“I have been retained several times by families to assist them in conducting meetings and negotiations among family members,” says Gary Caplan, partner with Mason Caplan Roti LLP in Toronto, who practises both litigation and ADR.

Caplan says he’s been called in to assist where founding members of a family business are about to retire and there are issues around succession.

“The kids are working in the business and, not infrequently, the children have differing visions of where the business should go,” says Caplan.

He says that, sometimes, there are personality differences among the children and, sometimes,  the disputes have nothing to do with business planning but rather the interpersonal relationships among the children.

Caplan says that further difficulty arises for family businesses on tax planning, insurance and corporate advice on how to divide assets up.

It can also arise if and when one of the children wants to be compensated for taking over the family business, which can cause a complete corporate restructuring, he says, such as who gets preference stock or common shares and who gets to be on the board of directors.

Caplan says an ADR professional can help familes from a “holistic” point of view and alert them to some of the issues involved.

This is necessary because the corporate lawyers for the family business would find themselves in a conflict position if it looked like they were choosing one child over another.

“Unfortunately, what lawyers fail to realize is that rather than head off a corporate response, they’re better off to start exploring ADR techniques as soon as possible,” says Caplan.

That can mean becoming a communications facilitator, acting as a mediator and, if there are justiciable disputes, acting as an arbitrator.

David Lees, partner with Mills & Mills LLP in Toronto, who practises largely in litigation, says that by using an ADR process, it keeps the matter private and allows more choice and creativity than a court process would allow.

“You can come up with these unique things, whether it’s a voting arrangement or a mortgage on the company where [one party] gets paid out over time,” Lees says of the kinds of solutions ADR could provide.

Lees says mediation can be helpful because it can put a process in place once family members identify what they want.

He also says this applies to trusts, when the succeeding children can plan ahead for generations.

Caplan says that, for a successful family business mediation, the first stage is getting all of the information about the company followed by getting the outside professionals necessary, such as tax advisors and succession planning, and getting them involved in the conversation.

At that point, the dispute resolution professional can come in to help resolve the situation. “There’s no cookie-cutter approach to any of this,” says Caplan.

Lees says that when it comes to salvaging family relationships in a tough succession situation, the creativity afforded to ADR processes and solutions can help fashion a tool or disclosure that will suit the personalities at play.

Lees says that by starting with mediation instead of litigation, families can prevent polarizing of certain family members at the start of what could be a contentious process.

“As well, the opportunity for the parties to have the catharsis of being in a room together can be something that wouldn’t happen in court,” he says.

“Because you are having to take these steps at mediation, with an end of trying to resolve it, it’s not as polarizing as a first step where you have children who aren’t getting along and don’t trust each other, who immediately go to a lawyer who then stakes out a very clear position of all of someone’s demands, then maybe bargain underneath that.”

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