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By Brooke D. Anthony
Family Courts use a process called ENE or “Early Neutral Evaluation” to help parties resolve social and financial issues outside of a formal court setting. In that process, the parties meet with neutral evaluators with experience in family court. Each party presents his or her case, the evaluators meet, review information, and report back to the parties about what they think will happen if the case goes to trial. The ENE process is voluntary, and it certainly does not work in all situations. But when it works, it can be instrumental in saving parties both the expense and emotional toll of extended litigation.
Ownership disputes in closely-held companies can be as emotionally charged and contentious as divorces. Owners of closely-held companies are often family members or close friends and the wounds leading to the dispute typically run deep. Owners of closely-held companies can be weary of court process and publicity. As importantly, litigation among owners in closely-held companies is expensive, time consuming and can have a significant negative impact on business operations and customer relationships. This begs the question – can we apply any lessons from the family court ENE process to complex ownership disputes?
In my experience, in the right circumstances, the answer is “yes.”
The most significant disputed issue among owners of closely-held companies is almost always the value of the business. Accordingly, the first step in an early neutral evaluation in this context is an agreement between the parties to retain an independent neutral business appraiser. That appraiser can be chosen directly by the parties, or if the lack of trust between the parties is significant, it can be chosen by a separate neutral, like a mediator. The parties retain the business appraiser to perform a valuation of the business and, if appropriate, the disputed interest. The scope of the appraiser’s retention should be negotiated by the parties and their attorneys. There are a number of factors to consider. Just a few items that should be addressed by counsel before the neutral appraisal process begins include the parameters of the valuation, the valuation date, discounts, how and when the appraiser should have access to the parties for interviews, the binding (or non-binding) nature of the process, who is paying, and who should handle disputes should they arise.
Attorneys also play an important role in evaluating whether an early neutral evaluation is appropriate in any particular case. Attorneys and clients should consider the likely outcome and cost associated with litigation in contentious closely-held ownership disputes as well as the benefits and disadvantages of entrusting the valuation process to a neutral. How the parties use the neutral business appraiser’s valuation will vary from situation to situation.
An early neutral valuation is not likely to work in cases involving derivative claims where a special litigation committee might be more appropriate. Likewise, clients who will not be able to accept a value of the business as appraised by the neutral appraiser would not be good candidates for an early neutral valuation. Finally, clients with no appetite for a resolution early in the case – perhaps the tensions are still too high or there are other business considerations at play – are likely not good candidates for early neutral valuation.
In my experience, early neutral valuation in closely-held ownership disputes works best for clients who want a separation but do not want publicity, have limited resources (or simply do not want to spend them on experts and attorneys’ fees in litigation), and/or whose business might be significantly harmed by protracted litigation. In that case, an early neutral valuation coupled with a clear explanation and understanding of what a court is likely to do at trial with that evidence can be all it takes to help the parties resolve their dispute for a fraction of the cost.
Brooke D. Anthony is a shareholder with Anthony Ostlund Baer & Louwagie P.A. She enjoys working with her clients to develop creative strategies and to reach efficient, business-oriented results. Brooke works with clients both pursuing and defending matters in many areas of the law, but she has particular experience litigating contract and shareholder disputes, employment matters, business torts and in the defense of professional liability claims. For more information, visit www.anthonyostlund.com.