Zacharius v. Kensington Publishing: The Intersection of Blended Families and Shareholder Agreements

This is a classic battle involving a blended family and pits a step-mother against a step-child.  Shortly after stepping down in 2005 as CEO of the family publishing company in favor of his son as his successor, Walter married Suzanne in 2006.  Walter, who held a majority of the stock of the closely-held corporation, and his two children entered into a stock voting agreement that kept voting to the group of the “initial shareholders,” who were Walter and his two children.  Walter died in 2011.

About a year later, frustrated that she had no input on the selection of directors, Suzanne attempted to sell her majority interest to a major publishing house.  She sued the corporation and Walter’s two children in New York state court to break the stock voting agreement.  Suzanne had a litany of complaints, including a claim of excessive compensation of the children.  Not unexpectedly,  the defendants move to dismiss the lawsuit.  The court dismissed five of the six grounds in the complaint, upholding the stock voting agreement.

The substantive issues aren’t as interesting to me as the situation, which seems to perfectly illustrate a case of poor planning on Walter’s part.  Or was it?  Walter may well have intended that Suzanne not receive full benefit of the Kensington stock because it clearly was conceivable that his plan, which divided the stock economic rights from the voting rights, was going to negatively impact Suzanne, his subsequent spouse.

Let’s face it: a majority of closely held stock is virtually worthless without the right to vote that stock.  If Suzanne was unable to monetize the stock or otherwise make it reasonably productive of income.  If the trust was a QTIP trust, Suzanne probably would have had at least some right to make the trust assets “reasonably productive of income.”  Maybe the trust had other assets that did produce income.  This ruling sheds no light on these issues, so this is sheer speculation on my part that is based upon my experience as a tax and estate planning lawyer.

Suzanne was not the mother of Walter’s children, and, since she married Walter late in his life, probably didn’t have any relationship with Walter’s children.  I strongly suspect that suing Walter’s children didn’t help herself with any positive relationship with them.  Walter and Suzanne probably were in the blended family spousal category of “empty nesters” in our two books on estate planning for blended families.

What could Walter have done to help Suzanne?  For starters, he could have required the corporation or his own children to buy his shares from his estate.  The bottom line seems to be that Suzanne sued because the existence of the stock voting agreement meant that she was thwarted from enjoying any real economic benefit from the majority interest in the Kensington stock.  If Walter didn’t intend Suzanne to receive any economic benefit from the stock, then he shouldn’t have left it to her.  I strongly suspect that this case will settle with Walter’s children purchasing Suzanne’s interests or in some way paying dividends on that stock.

Estate planning for blended families is difficult and often poses gut-wrenching choice decisions over how to treat a subsequent spouse and the client’s children.  What is sad in this case is that Walter’s plan virtually guaranteed a lawsuit by Suzanne against his children, which is not something that I would have recommended that he do.  Not only are lawsuits expensive and emotionally charged, but lots of family laundry gets aired for a voyeuristic public.   The lawsuit probably will destroy whatever minimal chance of any relationship between Suzanne and Walter’s children.

About lpaulhoodjr

I am an inactive lawyer who practiced almost 20 years as a tax and estate planning lawyer. Today, I am a speaker, author and consultant on tax and estate planning. In the recent past, I was the Director of Planned Giving for The University of Toledo Foundation. I am the co-author of six books, the sole author of another book and a frequent speaker and writer on estate planning, planned giving and business valuation.
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