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Business Problems In Estate Administration DuPage County Bar Association Seminar

March 10, 2015

I. Family Feuds

74% or more of companies in the US are family owned and managed

25% of these go out of family control every generation

Most spouses and children are not competent to run the family company: they

want cash, NOW!

II. Failure To Plan

Wrigley Co.: small now since 1977 deaths without trusts to cover growth in value

of company against income taxes, followed by 1999 death when younger wife

could claim Wisconsin community property – and estate subject to Wisconsin

income tax rate, then twice that of Illinois

The company’s cash flow is usually the only asset available: most buy-sell

agreements and estate plans lack “Key Man” insurance or other sources of funds

except a sale

This means a sale to insiders or outsiders to obtain funds: and a company run to

save taxes may have no profits to justify high business valuation for purchase

III. Who Owns This Place?

Private Companies Keep Their Own Share Or Membership Records: Badly

Due Diligence Counsel will require a full “corporate book” going back to the

entity’s founding, with all share or interest transactions, debts, other contracts

affecting control (like joint ventures). What does your book look like?

IV. Who Has Authority To Manage The Company, And To Make Contracts?

Corporation: only Presidents (probably dead now) have apparent authority to

contract: otherwise Board of Directors. Cf. Fritsche et. al. v. LaPlante et. al. No.

2-09-0329, Ill. App. 2 Dist. Ap. 5, 2010 (revoked Power of Attorney and property

transfer actions authorized and attested to by family member who was corporate

Secretary, not President). Incumbent actions may be later contested as unfair and

wrongful to other owners/heirs, cf. In Re Bachrach Clothing, Inc., 480 B.R. 820,

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US Bk Ct. N.D. Ill. Oct. 10, 2012 (BK Court may resolve fraudulent transfer

claims.) And Cf. 805 ILCS 5/9.10, Board authority to make distributions only if

does not render organization insolvent.

Limited Liability Company: Managers in manager-managed, Members in

Member-Managed LLC’s have authority to bind entity in contract with third

parties. Action may be wrongful.

Partnership/Limited Partnership: Any general partner can bind entity, LP no

authority except may replace GP by terms of agreement

Trusts: Trustee with remainder or other distribution interest may be removed for

conflict of interest in trustee and recipient roles, cf. Faville v. Burns, 2011 IL App

(1st) 110335

V. Dispute Resolution Options

Buy Out The Objectors: see Noonan v. Harrington, U.S.D.C. Il. 2010, 740

F.Supp.2d 970 (Sale price to minority owners incorporated all future value, no

right to continued dividends case could proceed.). Note dissenter’s rights section

11.70 of BCA, means dissenters may be entitled to fair value, not fair market

value, if dissent from fundamental corporate action

Distribute Something Early: see Estate of Boyar, 2012 IL App (1st) 111013,

heirs who took some personalty from executor’s distribution could not then

contest the will, based on doctrine of election

Try Mediation: Unlike arbitration, this isn’t binding, but a trusted mediator may

be able to get the parties to recognize the value of family relations over money

amounts less than the cost of litigation

Get professional management, to maximize EBITDA for sale: The Turnaround

Management has more than 6,000 members, the Midwest Business Brokers and

Intermediaries has more than 240: there are experts who can help maximize

returns and minimize estate and income taxes on sale or intra-family transfer of

business interests

VI. Current Client Checklist

Get a buy-sell agreement in place that resolves valuation and control disputes in

advance, and fund it with “key man” insurance if possible, to buy out decedent’s

share so remainder of the family can continue the business

Check the corporate book and financial records so the property can be sold

“Clear the underbrush” of family members not working in the business, so long-

running minority interest disputes can be avoided

Show a healthy profit on the company’s annual tax returns, so the sales price will

be healthy if sale is needed: estate taxes are much higher than income tax, and

planning options can reduce both types of tax.