Family-Business Default Rules

Dimas Flores Construction Inc. & Casitas Flores LLC

The majority of U.S. businesses are family owned

35% of the

are family owned and operated

Contractually Protecting The Family-Business

Family-Business Default Rules

1.operating clause that allows the incorporation of oral agreements and implied agreements;

2.exit right;

3.limit equity’s role in a family-business; and

4.waiver of default rules must be clearly negotiated.

“Family-business” means…

a business entity, no matter how large or small,

which effective control of the business rest in the families’ hands.

Effective control by the family is evident byat least two family members being involved as owners or managers.

operating clause that allows the incorporation of

oral agreements and implied agreements

1st Default Rule...

Operating agreement” means..

the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof,

of all members of [name of business] company, concerning matters of the business.

2nd Default Rule

Right

Default Buy and Sell Agreement:Majority investors will enter into a buy and sell agreement whereby in the event any of the minority investors desires to terminate [his/her] activity with the businesses named here that the corporate stock held by the terminating investor

will be first offered to the remaining investors or the corporation. The bylaws will further provide that in the event none of the investors desire to purchase the stock that then and in that event, the corporation may purchase the minority investor’s shares. The agreement must be documented

in writing. If neither the shareholders nor the corporation want to purchase

the stock or are unable to purchase minority investor’s share, a willing buyer in the open market may then purchase the stock.

3rd Default Rule...

Limit equity’s role in a family-business

Waiver of default rules must be clearly negotiated

4th Default Rule...

Application of the Default Rules

What state should adopt the family-business default rules?

Maine