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.