INSIGHTS

The Role of the Corporate Referee

From time to time, attorneys ask me to act as mediator in a situation where partners in a business are not getting along. My experience has been that partners act more like a team when they are struggling together to make the company survive.

But surprisingly, the business is usually quite profitable when the partners begin to argue. Once the company is on firm footing and profitable, human nature — mainly greed — takes over and the partners start quibbling about what, in so many cases, are trivial things.

Planning a Strategy for Peace

My approach usually starts with a one-hour meeting with the company attorney to get an objective view about the personalities and the causes of conflict. It’s good to get an unvarnished opinion about what is really happening. The attorney provides me with insights about the personalities of the partners and what their main issues are.

The toughest situations to resolve occur when the company is extremely profitable and the parties don’t want to sell their interest. From my point of view, this type of situation, though more challenging, is more rewarding when it is favorably resolved. Usually I can set guidelines for the partners that they are able to live with in order that the company continues to prosper.

Meeting With the Partners

My approach is to sit down with each partner separately. I let him/her talk about complaints, misgivings, and areas of distrust. I don’t act as a judge in the meeting; I merely try to learn what is going on in the partner’s mind.

By simply listening to the partner, I can get him/her to be more transparent and to reveal the real issues. Sometimes during these initial meetings it turns out that the issues aren’t so severe and the situation can be resolved rather quickly.

As I meet with the other partner(s), separately, I come armed with the opinions and gripes of the first partner. I make it a point, however, not to let each subsequent partner know what his/her associate was complaining about. I merely act as a non-judgmental listener and make it clear from the outset that I will have no opinion until I meet with all the partners together in the presence of the company’s attorneys.

Sometimes, this approach allows the partners to cool down and to realize how foolish they have acted. After all, in most cases that I’ve been involved with, the company is profitable and there is no logical reason to destroy a moneymaking business.

Meeting With the Company Attorney

After the initial meeting with each partner separately, I then sit down with the company attorney and tell him/her what I have discovered. The attorney then usually gives me valuable insights as to how the situation can best be handled based upon his/her experience with the partners.

Those insights can reveal personal pressures that might exist for a particular partner that would explain the partner’s behavior. For example, there could be children of the partner who want to get involved in the business and share in the “wealth.” In other cases that I’ve seen, there are gambling debts that a partner has incurred that have put tremendous pressure on the partner and the partner’s spouse.

There are myriad reasons why partners begin to act out in a situation that would otherwise call for rejoicing in the success and profitability of the company. My job is to find out what these reasons, some of which are not readily apparent, are.

Meeting With the Partners in the Presence of the Company Attorney

My next step is to meet with the partners in the presence of the company attorney. My experience has been that the company attorney usually tends to calm things down.

At this juncture, I have insight from each partner singly as well as an objective overview from the company’s attorney. With this insight, I suggest a pathway whereby the partners can “live” together in peace and keep focused on the prosperity of the company.

What I try to do at this meeting is set out broad outlines as to the expected responsibilities and behavior of each partner. I try to openly and quietly discuss these broad outlines and to find some common ground for the partners.

If it looks as though the partners will accept my suggestions, I then get to work on a formal draft that I call “Duties and Responsibilities of a Partner.”

Duties and Responsibilities of a Partner

Once I have completed the draft, I review it with the company attorney to see if I have avoided any pitfalls or conflicts. The attorney usually provides great insight into my document and recommends changes or additions wherever necessary.

The document is then formalized and presented to the partners in the presence of the attorney. Invariably, I try to avoid legalese and weighty words in the document. These would tend to turn off the partners. I make it as short and simple as possible. I always try to keep the document to three pages, or less.

When I meet again with the partners and present them with the document, I ask the attorney to be present. Note that I never present a document unless I have total confidence that it contains nothing that would set the partners off.

Finally, I ask the partners to show their good faith by acknowledging the document and signing it in the presence of their attorney. The attorney tells them that their signing it merely shows intent and doesn’t constitute a binding legal document.

My experience has been that once the document is signed, the partners behave accordingly. I am called in immediately when any disputes arise so as to calm the situation down as quickly as possible.

When I communicate the fact to the partners that they are quite fortunate, indeed, to have built up such a successful company and to be reaping the benefits of their efforts, they usually return to work with renewed focus.

Good luck!


Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com.


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