Case in Point: The Case of the Uneven Even

The Enterprise

Tom Kendry started Kendry Pools in 1970. Kendry Pools designs and installs pools and patios for high end residential and resort facilities in the GTA and the Golden Horseshoe, with licensed distributors in California and Nevada. Tom has a home in Oakville, a cottage in Bracebridge, a winter home in Palm Springs, as well as a number of investment properties in California and Nevada. His net worth is estimated to be just north of $25 Million.

The Players

Tom has a son (Kyle) and a daughter (Mandy). Kyle is in the business – VP Sales. Mandy lives in Kenora, Ontario with her common law partner and their five year old son, where they manage a small, but popular, B&B and Wilderness Outfitters Post that`s owned by Tom.  Mandy takes her family for a visit to Toronto every few years. She knows nothing about the Kendry Pools business. Mandy and Kyle had a difficult relationship growing up, which has been calmer in recent years, largely because Mandy moved away.

Tom`s wife passed away five years ago. Tom married Sally last year. It was a second marriage for both of them. Sally has no children and is financially independent. Kyle`s and Mandy`s relationship with Sally is cordial, at best.

The Challenge

Tom has expressed an interest in slowing down. He`s always wanted to have Mandy and Kyle involved in the pool business but Mandy was never interested. Tom would love to see more of Mandy and his grandson but distance and weather conditions have not made things easy.

More recently, Tom has been thinking, that if he offered his business to Kyle and Mandy at an affordable price, maybe he could get Mandy to move closer to home and she and Kyle could run the pool business together.

Over the Christmas holidays, Tom had a conversation with Kyle and Mandy. It did not go well. Mandy was silent and couldn`t wait to fly back to the quiet of Kenora. Kyle was livid. He had always expected to take over the pool business from Tom and had no interest in being in a partnership with his sister Mandy. The prospect of her and her partner Chad (who Kyle couldn`t stand) living closer to home was unnerving. In addition, during their conversation, Kyle discovered Tom does not have a will. The thought that Kyle`s stepmother, Sally, could wind up owning Tom`s business was terrifying.

Kyle approached Tom with a friend, Jack, who is a venture capitalist and thinks he can open up new markets for the pool business. Kyle suggests that he and Jack would be interested in buying out Tom at the favourable price and terms he had offered Kyle and Mandy over Christmas.  Tom is wary of Jack, who he thinks is slick and will wind up destroying a highly successful pool business that has taken Tom almost 50 years to build. Tom tells Kyle that the favourable price he was offering was only to Kyle and Mandy and that if Kyle and Jack wanted to buy, they would have to take on Mandy as one of their partners. “Take it or leave it”, Tom said, “otherwise I will find a buyer and sell the damn business”.

On his way home from his meeting with Kyle, Tom suffers a mild stroke and is rushed to the hospital. Kyle drives back from his visit with Tom at the hospital more worried now than he has ever been. Jack suggests that the family bring in his friend, Robert, who is a lawyer and an estate and succession planning expert, and who has a lot of experience facilitating resolutions in family dispute situations. Kyle finds a calm moment when Tom is convalescing at home and talks to Tom about engaging Robert. Tom discusses the matter with Sally and she encourages him to get Robert involved.

A Resolution

Robert has a meeting with the family and describes what the facilitation process will look like. Tom is anxious to get started. Mandy and Kyle are skeptical.

Robert has separate confidential meetings with Tom and Sally, with Kyle, and with Mandy.

Tom insists that if he can put Mandy and Kyle together, they will learn to get along and Mandy’s lifestyle will improve dramatically. Robert says to Tom, “When you started your business, how would you have felt if someone came to you and insisted that you had to go into a partnership with a total stranger?” Tom responded, “One way or another, there is no way that Mandy and my grandson will not have a share of the business I worked so hard to create over so many years.” Sally confirms she does not need Tom’s money so just take her out of the equation.

Mandy says that being forced into a partnership with her brother Kyle, will be a form of death and that she is quite content with her lifestyle in Kenora.

Kyle shares Mandy’s feelings about being forced into a partnership with her and he continues to be concerned that, despite what Sally says, Sally will inherit a good part of Tom’s estate.

Various discussions ensue, separately, and among all the stakeholders. The process takes about nine months and, with Robert’s guidance, the group finally settles on the following resolution:

• Tom will sign a will to provide that his assets, other than his house and his shares of Kendry Pools, will be divided equally between Mandy and Kyle. Tom will leave Sally with a 50% interest in their home and the right to live there for up to 3 years after Tom is gone, after which the home will be sold and the proceeds divided equally between Sally, on the one hand, and Kyle and Mandy on the other. Tom’s will further provides that the B&B in Kenora will go to Mandy but that she will have to account for that value in the distribution of Tom’s wealth between Kyle and Mandy.
• Sally and Tom will enter into a marriage contract in which they will each release any interest in the other’s assets, including Tom’s shares of Kendry Pools, other than their arrangements regarding their home.
• Tom’s shares of Kendry Pools will be valued and frozen and Tom will take back non-voting preference shares for the frozen value. In addition, Tom will receive a further class of special shares giving him voting control of the Company. Kyle and Jack will own the common shares of the Company and loan the Company sufficient money for the Company to redeem 25% of the value of Tom’s frozen shares immediately. The parties will enter into a shareholders agreement which will provide, among other things, an obligation on the part of the Company to buy back the remainder of Tom’s frozen shares over a five year period. The shareholders agreement will further provide that, upon Tom’s death, if there is an unpaid balance on Tom’s freeze shares, Kyle and Mandy will share equal voting rights on Tom’s voting shares in respect of major decisions such as a sale of the Company, until Tom’s freeze shares have been paid in full, at which time those voting shares will be redeemed. Tom’s will will state that the cash received from the gradual redemption of Tom’s freeze shares will be divided equally between Kyle and Mandy.
• Finally, in an effort to ensure a smoother transition during any period that Kyle and Mandy are sharing voting control of Kendry Pools (and to allay Tom’s fears that Jack will take Kyle ‘down the garden path’ when Tom is gone), the family agrees to assemble an Advisory Board of industry and financial experts to help guide them in their decision making.

Tom and Sally are spending more time in Palm Springs these days with occasional visits to their grandchildren. Mandy is expecting a second child and continues to enjoy her life in Kenora. And, to Tom’s surprise, Jack has opened up a number of lucrative opportunities for the Company in Bermuda and the British Virgin Islands.

Moral of the story – there are many ways to pool your assets.

Tune in next month when the Case in Point will be the Case of the Glitters.