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Family Business Dispute: Mediation/Arbitration

Issue

When two brothers who jointly owned a collection of family businesses came to an impasse over the operation and possible division of the companies, how were they able to resolve their dispute and move forward?

What Happened?

Two brothers, each with a different lifestyle and financial need, owned several businesses equally between them.  The businesses were originally started by their father, who bequeethed them to his sons.  Under the brothers’ management and active involvement, the enterprises thrived, but serious disagreements arose regarding their respective salaries, perks, distributions, and strategic plans.

The conflict escalated to the point that one of the brothers filed suit against the other, which in turn prompted a counterclaim, with both sets of allegations based on purported breach of fiduciary duties, deadlock, and shareholder oppression.

Special Considerations

Ownership of the various businesses proved to be complicated:

  • While each brother operated specific entities independently from the other, they both owned every entity equally
  • The entities run by the younger of the two were successful, and he felt that his hard work and business intellect deserved a greater compensation package
  • The older brother, seen as their father’s favorite son, had worked more and more closely with their father in starting the businesses
  • The wives and children of both brothers also worked in their respective businesses and received many perks and became equally immersed in the feud between them
  • Each brother was racking up significant legal and accounting fees to pursue his claims, and much of their their attention and energies were diverted from needs of the business
  • Counsel for both sides recognized that they were on a course that would destroy the business that had supported the familly for two generations
  • If the brothers did not stop the blood feud, the financial drain as well as the effect it had on the family relationships would have disastrous consequences.

How Did the PREMi Associate Help?

Counsel for the brothers agreed that it was in their clients’ respective best interests to to determie a better system for running the companies, and the court ordered the matter into mediation.  Counsel selected a PREMi mediator with extensive experience and a creative approach to resolving complex issues who then:

  • Conducted a pre-mediation conference with counsel and the two brothers
  • Suggested that perhaps the parties could agree on a form of binding arbitration to settle their disputes if mediation was unsuccessful, which the parties agreed could result in a substantial cost and time savings
  • Agreed to serve as both mediator and arbitrator for the proceedings (commonly referred to a Med/Arb) at the request of both sides, after fully disclosing the benefits and ethical issues associated with the process

The mediator proceeded to conduct several sessions during which the various problem areas that existed in running the business were identified.  The mediator was able to get the parties to agree upon and implement temporary operational measures, and called for a a short hiatus. When the mediator called the parties back to see how they were doing with these measures, the parties told the mediator how surprised they were at their ability to address some of the operational problems, but advised that they still needed to resolve the financial hurdles, ownership issues, and other disparity between the two brothers.

Following another mediation session, it became apparent that the older brother was not interested in running the business and would instead have preferred, within a short period of time, to retire.  The parties then agreed that the younger brother would buy out his older brother’s interests, but disagreed on price and terms.  Based on the Med/Arb model, the mediator stepped into the prescribed arbitrator role and had the parties submit written pre-hearing briefs and schedule the subsequent arbitration phase of the proceedings.

Because of the knowledge acquired by the mediator during the mediation process, his own expertise, and his demeanor, the parties decided that they would forego in-person hearings.  Alternatively, they chose to submit in writing all arguments and supporting documentation (including expert reports, affidavits, and other evidence to support their respective positions) for the arbitrator to consider.  This shortened process allowed the arbitrator of review all of the material quickly and render a decision for a binding award less than one week later.

After reviewing the parties’ submissions, the arbitrator called counsel and the parties to appear and gave the parties and counsel one last opportunity to make any other statements or present any additional information. Little or no additional information was provided. Within one week thereafter, an award was issued and the parties were able to close the purchase and sale agreement approximately 30 days thereafter.

What Was the Outcome?

Because of the innovative Med/Arb approach that the PREMi associate employed, the parties successfully executed a purchase and sale agreement withing 30 days after the award was issued.  The litigation was dismissed, countless dollars, time, and energy were saved.  Most important, however, the brothers and their families reconciled and the businesses have flourished under the leadership of the one brother.

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Disclaimer: This summary is illustrative of the types of cases and the manner in which the PREMI associate dealt with the matter. Care has been taken to avoid disclosure of sensitive or confidential information.