How Greed Can Unravel a Family Business

Mark Briol

And I frankly, don’t understand why anybody wouldn’t have an arbitration clause, especially at companies this big, where there’s this amount of money involved, and where there are families involved. Because in the end, what it does is it basically shows the entire world the dysfunction of your family, and you can never get that reputation back.

Pat Milan
Hi guys, how you doing?

Mark Briol
Good.

Pat Milan
Yeah? Hey, I’ve been reading the first several chapters of the book, which, for our viewers, depending on when you’re watching this, it’s going to come out near the end of 2024. There’s one case that really defies what I would call the typical themes we see. You know, when you see the majority of the family business shareholders disputes, we’ve talked about it a lot. The minority shareholder is typically the one that’s either being misled, defrauded, improperly compensated for their contribution or for their ownership. But I have to say, one chapter in your book, those tables got turned pretty quickly. It’s a Minnesota case, known as Evanstad Upshur-Smith, and for our viewers, Upsher-Smith Labs, this was a family owned, billion dollar pharmaceutical company that really became unraveled by a daughter shareholder. I wonder, Mark, it’s just an incredible story. Can you just set it up? I mean, what happened here, that a daughter shareholder literally destroys a billion dollar family company?
Well, I’m not sure she destroyed the company. But the family was certainly not in the same shape it was before all this happened. The first question he asked is, when you read the chapters in the book, and when you watch these podcasts, you have to ask yourself, do you really want to be rich? Because in this case, the owners of the company, the parents, started off this company. And then they had two children. They had Serene and they had Mark. Now Mark, he took an interest in the business from the time he was about 12 years old, he worked in the business and then moved into marketing and then moved into management, and slowly but surely made his way up the ranks in the executive branch. Whereas Serene didn’t take a lot of interest in the business. I mean, she focused on her family and doing things that she wanted to do. And in about 2014, everybody held about 25% of the company, the parents and Mark and Serene each held about 25%. And, you know, Serene would get about $10 million a year in payments from her parents to assist her with living expenses. She also got other things, for example, they purchased her house. In 2014, however, something happened that caused the entire family to commence an implosion. And that was, the father determined that he wanted to give Mark 1.51% of his own shares, which would have given Mark then, 1.51% more in stock holdings than Serene.
And to be clear, he was working hard. He was doing a great job growing this company, right? I mean, 1% stock at bump up for doing an amazing job, over a sister who has no involvement other than collecting a check, correct?

Mark Briol
That’s correct. And it was 1.51%, which raised his stake in the company to a little over 26%. Whereas Serene, had a little, you know, had a little less than 25%. And that caused things to just spiral out of control. One of the things they could have done differently is they had one of the accountants approach Serene, and tell her about this bonus that was being given to Mark in terms of stock. Serene just couldn’t have it. And it just started an implosion of the family that didn’t end until the father’s death. I mean, he died without them talking. And it’s just a tragic, tragic story. Because in the end, everybody made more than $100 million. I mean, $100 million. And when I did the math, I think that the extra 1.51% came out to be about $5 million. And, it’s just a tragic, tragic story.

Pat Milan
So the brother gets a little over 1% Bump. And the daughter who’s not involved in the company kind of loses her mind over this whole thing. Scott, there were, I don’t know, I can’t even count them. And when you read the chapters, it’s like opportunity after opportunity after opportunity to settle. And I just feel like the brother, who was the CEO, really did everything possible to reach out to his sister to settle this, and she just was going to have nothing to do with it.

Scott Benson
That’s true, you know, Mark originally reached out to her with three alternatives, which normally in a normal case would settle it. He said, Look, I’ll buy all your shares, for the appraised value, or we’ll take that appraised value, you can buy all my shares, and I’ll get out of the company, or we can sell the company and split it up, pursuant to the amount of shares that each of us own. She didn’t want to do any of those things, though Serene did come back finally and say, let’s have a sale of the company. But that still didn’t resolve it, she still wasn’t satisfied proceeding in that manner, and eventually brought a lawsuit to determine the value of her shares, the value of the company and the value of her shares. So it was just so many opportunities to settle this. And in the end, Serene would have received much more with the offers that were made from Mark and from her parents than she actually got from the court in the end, which is a good lesson for folks about being reasonable when negotiating with your majority or minority shareholder. Because in this case, she certainly ended up, she would have been better off taking one of the offers that were made to her.

Pat Milan
Mark, you’ve said so many times, because we’ve talked and we’ve asked a question, for people who are watching this podcast who find themselves in a pretty untenable situation, and they’re trying to figure out, how do I get out of this? Or how do I get a fair deal? But you have said when people come in to you to talk to you about taking this step, right, filing suit or going after it, that they really need to be prepared for an ugly time. And this case, just proves I mean, in spades, what you talk about, this is not going to be pretty.

Mark Briol
Oh, exactly. And it wasn’t. And in the end, as Scott mentioned, Serene lost millions and millions and millions of dollars by not doing a deal and instead waiting for the court’s order to come down. What was interesting to me is that there were no arbitration clauses in any of this. And had there been an arbitration clause. All of this would have played out behind closed doors, rather than in the public forum before Judge Edward Wall of the Hennepin County District Court who was an excellent judge, and who is probably the best pick anybody could have gotten on this case. But as a result of it, everything became public. And if it had been arbitrated, it would have been more private and I think the family could have at least hopefully been able to maintain some respect for each other. Because I think really what happened here was that Serene believed she was disrespected. And you know, as they say, when respect is a big thing in your life, and you take it away from someone, it’s hard to put money against respect. And I think that’s what pushed her.

Pat Milan
But you know, that’s really an interesting point. What happened here, because there wasn’t binding arbitration. I don’t know if you would recommend that in the bylaws or if it’s how you put it together. But because it wasn’t binding arbitration, it did end up in a public court. I think people think because it’s a family lawsuit, that nobody will be reading it. This thing was in the Minneapolis newspaper, it was playing out in the media, it ended up in the national media. And that’s the difference between filing it this way or arbitration, which can be closed. Right?

Mark Briol
Exactly. Exactly. And I frankly, don’t understand why anybody wouldn’t have an arbitration clause, especially in companies this big, where there’s this amount of money involved and where there are families involved. Because in the end, what it does is it basically shows the entire world the dysfunction of your family. And you can never get that reputation back.

Pat Milan
Scott, where would you put the arbitration clause? I mean, if you imagine if we’re back in this and you were representing the company, would you put it in the bylaws? Is it in the contract? Is it in the shareholder agreement? I’m curious, for somebody watching this, who’s like, we don’t have that, where should they be putting arbitration clauses?

Scott Benson
I would have a shareholder agreement that included an arbitration clause. But let’s remember how this all started. This was a company that originated from basically only having two drugs that they sold on a limited basis. And the mother and father here who started the company, I think, sold her car, had $1,500, and bought the company from a relative. I don’t think you’re thinking, when you make that $1,500 investment, that someday I’m going to have a multi-billion dollar company. So at the time they started the company and started giving shares to their children, they probably could never have envisioned the success that they were going to have with the company. And so it’s somewhat hard to point a finger at the parents here, in this case, saying, Boy, you should have had a shareholder agreement with your children that had an arbitration clause. I’m sure they never thought first, that the company would be that valuable, second, that their children would act this way. I shouldn’t blame both of them, that their daughter would act this way. And let alone the fact that she was receiving millions of dollars every year from her parents and from having owning the shares. They also named a winery that they had in Oregon after her, and provided trusts for her and her children. So, I’m sure they didn’t envision that this was what was going to happen to their family and to their company.

Pat Milan
I mean, and when you read this chapter and the book comes out, and I hope people will check it out, because it’s just astonishing. I mean, in the end, the daughter just didn’t want to settle. And I think the judge made it clear that, you know, even his power is limited in forcing something to happen. And she just kept running the string on destroying the family relationships, you’d even have to argue that you believe it had some impact on her father’s declining health. The parents were really upset that they could not get their daughter back in the fold, over the company. Mark, you made a point before we started. I said, well, what could you do to keep this from happening? And you jokingly said, don’t have kids. You just don’t know how these things are going to play out. That’s why you’ve got to build the protections into it.

Mark Briol
That’s exactly right. And, you know, you don’t know how they’re going to play out. But if you read every chapter in our book, you’ll find out that it’s not rare that they play out all the time. And that families implode over these issues all the time. There’s just something about money. And I don’t know what is too much. But one would have thought in this case that there was enough to go around, and what could they have done differently? I suspect he could have given him a cash bonus that might have gone over more easily than giving him an additional amount of stock that then was larger than Serene’s. I don’t know other than that, what they could have done to not cause this to happen. It just did. I believe she felt disrespected, and she never regained that respect.

Pat Milan
Yeah, my only take on that was I think she got the disrespect thing for me, when I’m reading the chapter that you guys wrote is that they actually, like you said Mark, they had a third party tell her, like an accountant or a family representative, instead of them telling her and I think it went off the rails. Scott, you know what I’m really interested in, you guys are in court, you’ve seen these cases, you built your careers around these. Have you ever seen a judge as upset as this one was? On the Record? I mean, literally on the record.

Scott Benson
Well, of course we’ve seen upset judges.

Mark Briol
But that’s not unusual. But we’ve started arguing about what degrees we’ve seen upset judges. It goes a long way.

Scott Benson
But I have never seen an opinion that was this lengthy. It was 350-some pages, if I’m recalling correctly. It was well written, it really provided a lot of information for us to be able to write this chapter, frankly. And it was well reasoned, well thought out. You realized after reading the opinion, what a tragedy this whole thing was. The judge went into all of the family relationships that had been strained and ruined, and discussed the law in an extremely powerful way. So, I don’t think I’ve ever seen an opinion that was that well written and that lengthy. And you’re right, the judge came down pretty hard on Serene in the opinion, in explaining what he was ruling, and I thought did so in a pretty, pretty good manner. And something I’ve never seen that lengthy before.

Pat Milan
Well, here’s the good news about this case, if our viewers are interested in it, the book is shorter than the opinion written by the judge. And we deal with a lot of other issues as well. So hey, thanks, guys for doing this, I really appreciate it. I mean, here we have folks, these guys are two of the nation’s best when it comes to helping navigate complex family business and shareholder issues. And I mean, we do a lot more than just family business, right? Briol & Benson minority shareholder rights, securities fraud, high net worth divorce, patent litigation; they’re prepared to answer your questions, they can help you figure out if you have a case, and how to get control your rights. And as Mark pointed out a little while ago, he’ll be brutally honest with you about what it is you’re about to undertake. These are the perfect attorneys to reach out to. Go to briollaw.com. Alright, that’s enough for today. We got more great stuff coming up guys. I keep reading chapter after chapter, I’m just I’m fascinated with mankind’s ability to to kill itself in court over money. Unbelievable stuff.

Mark Briol
Thanks for having us.

Pat Milan
See you on the next podcast.

Scott Benson
Bye.