Monday, May 07, 2007

The Other Woman

(NOTE: Every story is a highly disguised composite of several actual cases. All identifying details are changed, including names, family size, industry, genders and ages. I've fictionalized them so carefully that any resemblance to a real person or family would be coincidental.)

Many families have said their Dad’s business was like a mistress: consuming his time, money, and passion. Ralph Blivin’s son and daughter suspected a flesh and blood mistress as well. I had to admit that was a plausible hypothesis.

Ralph, 74, hadn’t lived at home for several years, as his wife’s diabetes-related health problems deteriorated. “To make room for the nurses” was his ostensible reason, which Sam and Karla didn’t challenge. But they did complain as his visits to Mom became less and less frequent. Karla, of course, visited her mother daily and coordinated all the medical, home care, and household logistics. As well as her own three young children and husband, she did her share of helping Ralph when he entertained customers and suppliers.

Mom was too heavy to be moved in and out of her chair by one person alone. She also suffered from morbid depression. Karla chided her father, “She still has her mind, you know. She’s always asking me if you’re all right.”

Her brother Sam did stop by the house briefly most weekdays, on his way home. But he worked ten- to twelve-hour days, and saved the weekends for his wife and children. “We don’t think it’s good for them to see their grandmother like she is.”

Sad as it was for Mom, the Blivins had settled into an angry equilibrium. Over the years, Sam gradually took on more and more responsibility, as his father argued with him (and with me) every step of the way. I could have challenged these clients on their relations outside of the business side, but I was on shaky ground with Ralph as it was, constantly ignoring his insistence that the only succession problem was Sam’s bullheadedness.

Ever since Ralph bought his high-rise condo retreat, he’d stopped coming in every day. He still called Sam every morning as well as the CFO and plant managers about details more appropriate to a small plant owner than the CEO of a $200M company. Sam and Karla touted Ralph as a genius who started wo a nickel and built Alltech Plastics into a nationwide leader in their niche. But Sam said Ralph was now “overcompensating for his age or something,” as he pushed them to be first to adopt the newest computer-guided machinery. Sam saw competitors shrewdly waiting for the second or third generation of those innovations, saving tens of millions in costs as the prices would drop, and avoiding “Betamax commitments,” as he called them. I’d heard father and son argue over that for years, Sam citing examples of Ralph’s premature changeovers in the past. “I guess we really screwed up all those times,” Ralph said sarcastically. “It’s a wonder we got where we are.”

When they came to a Board decision, Karla’s was the third of three votes. She increasingly supported her brother’s conservatism against her father’s mania to be “first with the best.” Disrespected, Ralph accused her of turning against him “because of her mother—she blames me.”

Ralph had often said, “If you don’t want me as Chairman and CEO, it’s two against one. You can have the whole company.” At the same time, he warned Karla that Sam, who had bought an original partner’s small stake, would have 53% of the stock if the company acquired Ralph’s. Karla had no motive to participate in a buyout. Furthermore, she feared it would kill her father: “It’s his whole life.”

Yet Ralph, to her surprise and Sam’s irritation, kept offering to leave. Sam wavered. Why should he pay for Sam’s stock, then maybe have to buy his sister’s eventually too, leaving himself with the risk and her witl the nice liquid assets?

It was the “other woman”--though never acknowledged by Ralph—whose presumed existence led to a breakthrough. Karla discovered, managing Mom’s household accounts, that her father only deposited $10,000 a month—a fourth of his Alltech income. Estimating that over a million dollars were unaccounted for, she and Sam confronted Ralph. “You think we’re going to finance a $70M buyout only to have that money go out of the family?” That was the closest they ever came to suggesting they thought—knew—Dad had someone else in the picture.

But he surprised them. “My stock is marital property,” he said. “Put it in your mother’s name, I don’t care. But give me a severance, five years’ consulting at my current salary. It’s none of your business how I choose to spend that.”

Deal? Or no deal?

copyright reserved 2006, Kaye Family Business Associates, Inc.

Wednesday, March 14, 2007

Suicide is Painless?

Tony Packo's Cafe in Toledo, Ohio, became famous in the US and Canada when Klinger, the cross-dressing Corporal in M*A*S*H, played by Toledo native Jamie Farr, mentioned Packo’s hot dogs in several episodes. Now the Packo family have made their own headlines crossing lawsuits over power, money, insults and hurt feelings.

I started to add this story to the “Family Feuds in the News” column (below) but then realized I’ve had enough similar cases so that I could use it this month in lieu of a fictionalized anecdote based on my own clients. In this case, the names are real and I know no more about it than what I read in the Cincinnati Enquirer.

The article (from the Associated Press) reports that founder Anthony Packo left his café, three other restaurants and packaged food businesses equally to Tony Jr. and his sister, Nancy Packo Horvath. Last June, Tony sent a memo to employees and suppliers saying that Nancy is not an executive or an employee of the company.

Nancy filed suit last month in Lucas County Court accusing her brother and fellow shareholder of libel, breach of duty and trying to force her out of the business. Arguing that she’s a director and corporate secretary of Tony Packo's Inc., Nancy seeks $500,000 in punitive damages and demands that Mr. Packo retract his June memo.

Now her brother and his son, Anthony Packo III, filed a countersuit seeking to dissolve the company. They claim it’s impossible to carry on the business “because the owners are in a deadlock.”

Imagine where all this leaves Nancy’s son, Robin Horvath, a company vice president.

Anthonys II and III ask the court to appoint a receiver to take charge of the company’s assets while its affairs are wound up and the corporation is dissolved.

Our question, ladies and gentlemen of the jury: At what point in the escalation of a feud does the Lose/Lose option (the business equivalent of suicide bombing) become inevitable?

copyright reserved 2006, Kaye Family Business Associates, Inc.

Tuesday, February 06, 2007

"Crazy" Sister vs. "Power-hungry" Brother

Chronic mental illness impairs one in every eight or ten adults. Which of us doesn’t have a relative—an aunt, uncle, cousin or in-law if not a parent, child, sibling, or spouse—suffering from long term inability to behave rationally and reliably in the adult world?

Wealth doesn’t cause mental or emotional problems, nor does it prevent or cure them. On the contrary: Disturbed family members’ “failure” to follow norms, behave sensibly, care for themselves, and view their good fortune as other members do can lead to dysfunction in the whole business ownership group.

Marilyn is such a member of the Huffman family.

She’s the oldest of four siblings. Thirty-five years ago, when Huffman Aerospace was about to make its initial public offering on the New York Stock Exchange, Mark and Jane Huffman placed $500,000 worth of shares in a personal trust for each child and another $500,000 worth in a Stewardship Trust in each child’s name. The personal trusts’ explicit purpose was to give the children (when they reached age 21) independent incomes, freeing them for creative work and contributions to society. The trustees were instructed to distribute as much of the dividend income as a beneficiary requested, and could make additional distributions (selling HA stock as needed) to support his or her education, health, maintenance, and career opportunities.

The Stewardship Trusts were to distribute only dividends to each beneficiary. The shares in those four trusts were to be voted in a bloc by the common trustee together with the parents’ shares, and could only be sold in two circumstances: if the family agreed unanimously to divest from the company, or for an individual beneficiary “in cases of severe, unforeseen difficulties.” Today, the stewardship trusts are each worth $50M and give each of the siblings an annual income over $400,000. They represent a total of about 10% of HA’s shares, and with the mother’s shares the total bloc of about 25% is sufficient to control the Board of Directors, on which all four siblings sit.

Jane, the founder’s 82-year-old widow, lives well within her dividend income of about $2.5M. Upon her death, her trust will pass to the benefit of thirteen grandchildren equally, skipping their parents. The Stewardship Trusts will also eventually pass to each sibling’s children, irrespective of the siblings’ personal estates.

Marilyn and her brother give conflicting accounts of the litigation she threatens against him and against the co-trustee of her Stewardship Trust. They more or less agree about the current financial situation of the four siblings:


Marilyn, 54

Janet, 52

Rick, 49

Sally, 45

HA stock in 1970 Trust

$0

$40M+

$32M

$50M

Other assets in 1970 Trust

$0

$10M+

?

$0

Assets in own name

One house, equity=$300K

?

?

?

Stewardship Trust income

$400K

$400K

$400K

$400K

Personal debt

$1M+ (tax liability)

?

?

$0

How did Marilyn burn through assets that would amount, if she’d held onto them, to more than $50M today? For 25 years, according to Rick, she has managed to “squeeze” the trustees (one of whom was her mother) to distribute millions for houses and household staffs, a horse breeding business, an antique auction business (both businesses paid substantial compensation to partners even as they were failing), divorce settlements, dubious “charitable” contributions to what the family termed “cults”, and three long psychiatric hospitalizations for anorexia nervosa.

Marilyn acknowledged all of that, except the word “cults”. Her two daughters and her son also respectfully refrained from using that word, though they said their mother had been irresponsibly generous to her “spiritual advisor.” Marilyn is deeply disturbed in reference to her own body, of course (she denies being 20 to 30 pounds underweight for her height), and my rough diagnostic guess would include both depression and paranoia. But she also has a number of realistic complaints on her side.

Rick, the brother and only sibling who has ever been involved in the business, has been Chairman and CEO for more than ten years, since their father’s death. He also holds his mother’s proxy for her voting shares, and is one of the trustees of his sisters’ Stewardship Trusts. In other words, he controls everything and will continue to do so as long as the shares aren’t sold. But here comes Marilyn claiming “severe and unforeseen difficulties.” She is, in fact, destitute. Her three children will have to support her when their grandmother dies, unless Marilyn is allowed to invade her Stewardship Trust. But that would establish a terrible precedent, in Rick’s view, especially as the family’s shares will soon be dispersed among 13 more trusts.

Rick is angry and frustrated at his “crazy” sister’s lifelong demands on their legacy. He calls the current demand “a crack in the dam,” likely to break through as a flood. It isn’t only a matter of retaining his own control over Huffman Aerospace and his two sons’ paths to succession. He also worries about the effect on the public market for HA’s stock (and thus the company’s capital investment opportunities), because if Marilyn does file suit, it will immediately become public information.

Their mother is cognizant of all this, but refuses to take sides or be drawn into the dispute. She has already bought Marilyn out of difficulties more than once with her own money, but to do so again would be “robbing my grandchildren,” she says. She understands Marilyn’s position that there’s still $50M of her own assets in the Stewardship Trust, but Jane won’t take a position contrary to her son as long as the other trustee agrees with his insistence on “stewardship not dissipation.” The sisters emphatically side with Rick. Although they feel bad about Marilyn’s decades of unhappiness, they ceased communicating with her about business years ago because of her “constant provocations” on the Board.

This case won’t be resolved through family meetings, but through mediation. Can you predict whether it will be settled Win/Win, Lose/Lose, or if Win/Lose, in whose favor?

copyright reserved 2006, Kaye Family Business Associates, Inc.