Family fiduciary feuds: how to mitigate conflicts and manage litigation in family-owned businesses and trusts

This article discusses the reasons for the high risk of conflict, strategies to minimise the risk of litigation, and provides critical advice to heed if conflict results in litigation.

Legal obligations

Fiduciary obligations are pivotal in both the business and trust realm. Personal family dynamics often collide with these obligations and with business necessities, resulting in conflict. Subjects ripe for conflict include: who is selected to control the family business, the level of compensation family members receive from the business, and the fairness of trust bequests and distributions. When family members assume fiduciary roles over each other, the risk is heightened that underlying tensions will boil over into litigation.

Mitigating conflicts

Trust settlors and family business owners can best mitigate the risk of conflict by proactively confronting family dynamics and including mitigation provisions in their governing documents. For example: 

• Estate beneficiaries and the next generation of business managers should be advised of the family succession plan. At a minimum, summaries of the governing documents should be provided.
  
  
• Consider including safe harbour clauses, fiduciary exculpation, the prudent investor and business judgment rule, and separate classes of voting and non-voting stock.
  
  
• Neutrals, like a corporate or professional trustee, should be considered over family members in fiduciary roles. Alternatively, a special business trustee or a trust protector could serve alongside a family fiduciary.
  
  
• Procedures for pre-litigation resolution, such as mediation, arbitration, or “baseball arbitration”, should be spelled out.
  
  
• Including fee-shifting, indemnification, surcharge, and (in states where they are valid), in terrorem provisions can disincentivise litigation through added cost.

When litigation arises 

Even the best planning cannot guarantee a dispute will not enter litigation. In the event a lawsuit looks imminent, the following early actions are critical:

1. Retain litigation counsel: Relying on corporate counsel who drafted the documents at issue is ill-advised because they may be necessary witnesses, and because doing so risks waiving attorney client privilege, particularly in states that have adopted the fiduciary exception.
   
   
2. Identify representation, avoid conflicts of interest: Engaging a single attorney to represent multiple family members is risky, given the likelihood that interests that begin aligned may later diverge.
   
   
3. Set expectations: Recognise that litigation is costly and will expose otherwise private family matters, including finances and personal squabbles, to public scrutiny.
   
   
4. Identify deadlines: Some critical fiduciary causes of action must be brought within 6 months or may be waived.

By anticipating conflicts and adopting proactive measures through estate and business succession planning, families may reduce the risk that conflict escalates into courtroom battles. And when litigation looks possible, consulting a litigator is vital to effectively navigate the complexities of fiduciary conflicts. 

Read the full version of the article here.