Boston Legacy Planning

Demoulas v. Demoulas: A Primer on How NOT to Structure a Family Business Transfer

Finally, we hear that a deal has been reached by which Arthur T. Demoulas will buy out family members and gain control of the Market Basket supermarkets, to the great relief of employees and customers. At the core of the long, sad story of the Demoulas/Market Basket supermarket chain and the ongoing strife between members of the Demoulas family is a failure of estate planning. Several key things caused the problems or made them significantly worse. What could have been small problems were permitted to grow into major problems, with no way to stop the impending train wreck. Opportunities to avoid disputes were missed, and the available techniques for resolving disputes were woefully inadequate.

The first problem was that the founder of the chain, Arthur (Athenasios) Demoulas, his planning team, and the family members who took control assumed that the legal documents involved were self-executing; they did not adequately plan for the human element. The business was purchased by two of his six children, Telemachus (Mike) and George. While Mike and George were alive things proceeded smoothly enough, and the business grew from a mom and pop store to a modern chain of 15 supermarkets. But when George died unexpectedly in 1971 it was assumed that Mike would take on the burden of running the business, while benefiting his own children and George’s children equally. Mike was the trustee of a voting trust for George’s shares. The unrealistic assumption was that a person with an adverse business interest could be made a fiduciary without providing safeguards. In this case, rather than safeguards, we find dispute avoidance and resolution systems designed to make things worse.

Perhaps most critically, there was a lack of transparency. George’s side of the family did not discover that anything was amiss until more than $800 million of value had been moved to Mike’s side of the family. There is wisdom in allowing problems to surface while they are small, to keep them from becoming big problems. That did not happen here.

In addition, all of the dispute resolution systems involved were win-lose systems. Corporate governance allows someone with slightly over 50% of the shares to exercise control over the corporation. Aside from corporate voting, the only dispute resolution systems involved were adversarial negotiation and litigation, both of which tend to polarize a situation.

Finally, the people who designed the business transfer did not provide a way to terminate the relationship once it soured. There was no deadlock provision requiring one party to sell out to the other party. Even the court decision did not resolve the dispute. The effect of Judge Lopez’s decision was only to continue the untenable situation in perpetuity, but with George’s family ostensibly in control. This is not to criticize the judge. The court’s role is to restore the situation that the testator or the parties to a contract intended, not to correct a flawed plan. This is why is it so important that care be taken when a business exit strategy is designed to build in flexibility and to consider all risks and options.

Now finally, more than 40 years after George’s death, and tens of millions of dollars in legal fees later, the family members are in the process of becoming disengaged. In order to reach that point, we had to have an extraordinary intervention in the situation by third parties, primarily the employees loyal to Arthur T. The cost to the company in market share, to the employees in wages, to the customers in increased prices, and to the Commonwealth in tax revenues has been substantial. We also find members of the Demoulas family with an implacable hatred for their cousins. What lessons can be learned from this tragic story of a business transition plan gone bad?

  • First, business transition planners need to be realistic about normal human emotions. It was foreseeable that either Mike or George might die. Putting the other in charge of the company, responsible for running the company and looking after his brother’s children with no checks and balances was not wise.
  •  Second, stock could have been put into a real trust, with a real fiduciary looking out for the interest of George’s family.
  •  Third, there could have been a specific and detailed requirement that Mike account on a regular basis to George’s children (or to their legal guardian or representatives), and vice versa.
  •  Fourth, there could have been provisions to encourage mediation, or to require arbitration of disputes. Other efforts could have been made to reduce polarization through structured negotiation, use of collaborative law, or otherwise. I have to think that lawyers trained in collaborative law would have seen early on that the best way out of this situation was to end the cage match, not just to give their side the upper hand.
  • Finally, deadlock provisions could have been structured into the agreement, which could have required a buyout of one side of the family by the other in the event agreement could not be reached. This is the resolution that was ultimately reached, but at what a cost.
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