baton passRecord Wealth Transfer. Over the next 30-40 years about $12 trillion from those born in 1920s and 30s will be transferred to the baby boomers, and the boomers are expected to transfer some $30 trillion to their heirs, with more than an estimated $59 trillion transferred from 93.6 million American estates from 2007 to 2061. Much of the wealth is the family business.

70% Never Gets to Third Generation. Shirtsleeves to shirtsleeves in three generations. The first generation makes the money, the second spends it, and the third depletes what’s left. For 70% of all wealthy families, the money has been spent, or otherwise lost, before the end of the second generation and 90% of families no longer have their wealth by the end of the third generation. No planning, no leadership, no communication. No money.

High Divorce Rates and Children with Multiple Families. At its peak, the divorce rate at 50% affected these families and their children, many of whom did not grow up with both biological parents. Less than half (46%) of U.S. kids younger than 18 live with two married heterosexual parents in their first marriage. Blood is thicker than water, and often blood isn’t thick enough.

Geographic Separation. In today’s global society, most adult children live a long distance from their parents, relying upon air travel, cell phones and other technological devices to keep in contact across time and distance. Of about 34 million Americans who are caregivers for an older parent, 15% live one or more hours away and nearly one third of those are helping someone with Alzheimer’s disease or dementia.

Why do Wealth and Legacy Fail to Survive?

Success in the Immediate Wealth Transfer. Most have all the proper structures in place for assets to be seamlessly transferred to the first generation. However they have not properly planned and accounted for the impact of divorce on family relationships, families separated by time and distance and children unprepared to handle new found wealth. There are stumbling blocks that doom their success.

Tripping on Their Legacy. The greatest stumbling blocks?

  • No Family Mission – Lack of Purpose
  • Distrust or No Trust – Lack of Communication and Mishandled Communication
  • No Family Leadership – Lack of a Family Governance System and Lack of Family Leadership

Tilting the Scales in Your Favor. There’s more to your family legacy and your wealth transfer than your will. Planning to succeed. Hand off your wealth well and your legacy does not end when you sign your Last Will and Testament. That’s the easy part. Unless you plan for your estate to be liquidated and the cash distributed (and your children to have little contact with each other after you die), there’s more to be done. Start planning now.

Communication – Lack of and Mishandled.

The often present lack of communication or mishandling of communication is exacerbated by divorced parents who don’t communicate, ex-spouses who have different agendas, half-brothers and sisters who dislike the divorce and each other, and the separation of long distances. And, there’s no substitute for being there. While they had their promise, increasing use of ever-expanding computer technology innovations, such as the internet, e-mail Skype, , Facebook, Twitter, iPhone, iPad and so many other hardware and software developments redefined interpersonal relationships and family communications in unexpected ways.

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Oil tycoon Harold Hamm and his now ex-wife, Sue Ann Arnall – whose divorce we have written about before – were involved in one of the largest and nastiest divorces in US history. Just last week, Mr. Hamm sent Ms. Arnall a personal check for $975 million in full payment of the cash award she received from the divorce court. According to Reuters – and amazingly for us non-billionaire types – Ms. Arnall rejected the check because she was afraid that cashing it would harm her chances of securing a better judgment after an appeal.

As litigators, we know that collecting on a judgment is often more difficult than securing it in the first place. So when should any plaintiff turn down a check paying a court judgment in full? Only when (a) they have a truly outstanding claim that will entitle them to a great deal more money than is offered, and (b) they know with certainty that they can collect against their target. It is a rare case where rejecting full payment of a judgment is a wise move, and a rare client with the fortitude to make that call.

In the end, and as Mr. Hamm’s personal fortune dropped along with oil prices, it looks like Ms. Arnall thought better of her initial decision and cashed the check, very likely settling the case.

Settling a case is always a judgment call that calls for collaboration between an attorney and their client and a clear-eyed weighing of the risks and rewards involved. But some cases are easier than others. Our personal opinion on when you should turn down a billion dollars in cash in full payment of a court’s judgment? You shouldn’t.

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TAGS: Business, settlement.

KEYWORDS: Business divorce, divorce, company agreement, operating agreement, shareholders agreement, buy-sell agreement, judgment, settlement.

 

Cleve and I recently discussed how a business owner’s divorce might result in losing control of the business. While loss of business control by marital divorce is a real threat, many business owners lose their companies through “business divorces” after squabbling with their investors.

Some new businesses are overnight successes, like Ben Distiller’s Texas Whiskey Distillery in San Marcos, Texas. Ben’s craft whiskeys caught on with connoisseurs around the world, gaining Ben a great reputation and huge orders for his whiskey – but without the inventory to fill the demand. Although Ben was rich in ideas, he was cash-poor – so to raise money for expansion he sold a controlling interest in his distillery to venture capitalists from California. Ben’s management style clashed with his investors – Ben wanted to maintain the same high quality product he built his reputation on, but his investors wanted to ramp up production to generate cash flow. Ben’s complaints resulted in the investors locking him out of the company he founded.

What can Ben do?

Not much. By selling a controlling interest in his company, Ben has ceded control of the company to his investors – all too common a tale. So what should Ben have done?

Tilting the Scales in Your Favor – Dealing With Investors.

Before jumping on the cash wagon, Ben should have consulted a lawyer before dealing with the venture capitalists. David Earhart, a Gray Reed corporate and M&A attorney, notes that VC’s will almost always demand control of a company, but a clever attorney can help a business owner retain as advantageous a position as possible. For example, when setting up the company Ben could have retained ownership of the intellectual property – i.e., the whiskey recipes – and licensed the IP to the company for a set period of time, thus giving him negotiating leverage with the VC’s. Other things to consider are to:

  1. Stay Capitalized: Too many business owners get into trouble when they realize – too late – that they are undercapitalized. Plan ahead and start negotiations with investors before you need their money – and are desperate enough for it to fully cede control of the company.
  2. Consult an attorney. A good corporate attorney can negotiate with investors and draw up corporate documents that give you the best possible terms for retaining some control over your company.
  3. Structure the Company and Shareholder Agreements: Set up the Company and Shareholder Agreements on the best possible terms on the front end, giving the most leverage possible.
  4. Choose Board Members and employees wisely: Make sure your board members and employees are experienced and capable, to prevent VC’s from demanding a wholesale replacement of your loyalists with members loyal to them.
  5. Get an employment contract: Ben could have secured an employment contract minimizing the grounds to fire him and maximizing his benefits if he is removed.
  6. Get a business divorce: If all else fails, negotiate an exit and a buy-out from the company. You will need an attorney involved to advise you on the best terms and navigate the shoals of possible non-competition and trade secret agreements.

A Real Life Example

Our example above was based on the real-life case of Balcones Distilling in Waco, Texas. After a bitter fight, Balcones’ founder and master distiller was just bought out of the business he started by the investors who bought a controlling stake in the business. For those wise souls interested in good whiskey, more information is available here.

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With an ongoing Oklahoma divorce case in mind last month Tilting wrote about Tigh A. Knott, his wife Lucy Knott and how a business owner’s divorce can impact his business and affect his partners. The real players were Harold Hamm and his wife Sue Ann.

Last week the court granted Oklahoma oil tycoon Harold Hamm (aka “Tigh”) a divorce from Sue Ann. Harold was ordered to pay her $323 million before end of 2014 and $7 million a month for 93 months. Harold’s fellow shareholders were relieved. Why? Because Hamm gets to keep his company and they don’t get Sue Ann as a member of the board. A larger property award might well have required Harold to sell controlling interest to get enough cash. Or, worse yet, placed his ex-wife on the board.  Could Harold aka “Tigh” have avoided betting his company?

Absolutely. Either or both of a prenuptial agreement and a company agreement (signed by his wife) could have sidestepped the drama.

The Facts. Harold Hamm is a self-made oilman and the chief executive and majority shareholder in Continental Resources. His foresight and timely investments in the Bakken Shale formation and fracing technology turned his company into a powerhouse and made him a billionaire 18 times over. Due to a lack of planning – a prenuptial agreement or a company agreement – Harold’s ex-wife was awarded over two billion – that’s “billion” with a “b” – dollars worth of marital assets, including a payment that Mr. Hamm must make to his wife of almost one billion dollars. The payment is so large that the presiding judge ordered that it be secured by a lien on twenty million shares of Mr. Hamm’s stock in Continental, valued at over one billion dollars. A copy of the Court’s 80-page long Memorandum Order can be found here.

Tilting the Scales in Your Favor – 4 Reasons to Sign a Prenuptial Agreement.

  1. Protect your business: If you own your own business, a divorce can cause that business a myriad of problems. Protect it with a prenuptial agreement and perhaps a company or shareholder agreement.
  2. Protect your partners: If you have partners, failing to have a signed shareholder agreement with all owners and spouses risks that, upon any divorce or death, the affected spouses may well become your partners with the right to participate in business decisions.
  3. Protect you (and your business) from debt: If most of your net worth is tied up in the value of your business and you have to split it with your spouse, then you either have to sell your stock or go into enough debt to pay off the divorce court’s property award. The right prenuptial and / or company agreements can avoid that risk.
  4. Protect your Business Valuation: Absent an agreement otherwise, a business can be valued a number of ways. Those signing your company agreement can agree in advance the method by which a partner’s ownership interest is valued and how a surviving spouse or ex-spouse will be paid, saving both time and money.

Previous Tilting Articles: Protecting your Business from a Lack of “Wedded Bliss”; How to Dissolve a Business;

Richard and Rachel Rich married 30 years ago and enjoyed a tempestuous union ever since. One year prior to their marriage, Richard started up a small computer products company, Orange Computers. During the marriage, Orange Computers’ business skyrocketed after the introduction of their premier line of attractive digital personal assistants. Even after taking his business public, Richard still owned a majority share of Orange’s stock and was believed by the public to be the digital guru responsible for its success.

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