Trust Buss'd

by Diane Klein

You don't have to know much about basketball to have heard of the Los Angeles Lakers, or to remember "Showtime," when the team won five NBA titles in the 1980s and Magic Johnson became a star. And you don't have to know much about estate planning to know why team owner Jerry Buss's succession plan was unlikely to succeed. All estate-planners know the grim statistics on family business succession.  Only around 30% of family businesses survive the death of their founder; just 16% make it to the third generation; and by the fourth generation (the founder’s great-grandchildren), just 3% are still in business and under family control.  This is actually a problem worldwide; family businesses in countries as different as Norway and Nigeria experience something similar.

Today’s post is not about whether Trump Enterprises will successfully survive our kleptocratic conflict-laden current President; nepotistic management by Donald, Jr., Eric, Ivanka, Tiffany and Barron; and eventually pass into the silver-spoon-laden hands of any or all of the existing eight grandchildren and others yet unborn.

It’s about a different fertile womanizing billionaire: Jerry Buss, owner of the Los Angeles Lakers, who died, aged 80, on February 18, 2013.  Jerry had four children with his ex-wife Joanna (Johnny, 60; Jim, 57; Jeanie, 55; and Janie, 53), and two with his long-time girlfriend Karen Demel (Joey, 32; and Jesse, 29).  Each now owns 11% of the team (through a ⅙ interest in the family trusts that hold a 66% ownership share).  The team also employs them all.  Or at least it did - until Jeanie fired Jim last month.

Despite the hagiographic coverage his estate plan received in the immediate aftermath of his death (one blog called it “visionary”), recent events reveal that Jerry Buss made several classic family business succession errors: failing to prioritize either business success or family control, thereby jeopardizing both; failing to see his children’s strengths, weaknesses (and loyalties) clearly; and underestimating the effects of his own absence.  These, combined with some plain bad luck for the team, have left what his children once called “a near-perfect ownership blueprint” in tatters, and cast serious doubt on the long-term viability of family control.

Ironically, if the family can retain control for long enough to pass the team on to Joey and Jesse, the prospects are good.  Joey has earned praise running the D-Fenders, the NBA Development Team owned by the Lakers.  Jesse, the youngest, is in his second season as assistant general manager of the Lakers, and is director of scouting for both teams, a role in which he has had some high-profile success.  But they have to get through the current crisis first.

Jerry Buss’s succession plan focused primarily on two of his four older children, daughter Jeanie and son Jim.  Both were groomed for their roles for many years by their father.  Jeanie served as executive vice president of business operations for most of a decade before her father’s death, and is currently in her eighteenth season with the organization.  She was her father's choice to represent the team at the NBA level. Jim began as assistant to general manager Mitch Kupchak from 1998-2004, and was Vice President of Player Personnel thereafter.

When Jerry died in 2013, Jeanie became president, and that made her Jim’s boss.  That’s an estate-planning red flag, to be sure, particularly when, as here, neither child reported to the other during their parent's life.

The current legal dispute between Jeanie and Jim arises from their complicated multiple organizational roles.  They are on an equal footing as trust beneficiaries and 11% owners; they are both trustees of the family trusts (along with brother Johnny); they both sit on the Lakers board of directors.  But in her role as president, Jeanie had the power to fire and replace the head of basketball operations, a power she exercised against her brother Jim, on February 21, 2017, after a string of progressively worse seasons for the team and a near-total breakdown in communications between them.

Jim has retaliated with boardroom maneuvers.  Oldest brother Johnny, executive vice president of corporate development (and co-trustee and co-director with Jeanie and Jim) notified Jeanie on February 24, 2017, about a March 7 meeting of the shareholders (including minority owners Anschutz Entertainment Group, also known as AEG, and billionaire Dr. Soon Shiong, who purchased a 5% share from Magic Johnson in 2011).  At this meeting, he and Jim planned to put forward a slate of four directors, not including Jeanie.  

Were Jeanie to lose her spot as a director, she would no longer be qualified to represent the Lakers at the NBA level.  However, the terms of the family trusts mandate that the three co-trustees take all actions necessary to ensure that she remains the controlling owner.  That makes voting her off the board a breach of trust - something she has gone to court to prevent.

On Friday, March 3, 2017, Jeanie sought a TRO preventing the shareholders’ meeting from going forward.  The threat of this litigation was apparently enough to make her older brothers cancel the meeting and, on Thursday, March 2, 2017, they signed a document reelecting her as controlling owner.  It is not clear what legal significance this could have, of course, since the trust terms already guarantee her that role.

Although Jeanie has prevailed in this first skirmish, the war is far from over.  It now looks as if Johnny and Jim’s ultimate goal is to sell their shares, leaving their four siblings owning just 44% of the team. Younger sister Janie, who works as director of charitable services for the Lakers, thinks that is their intention, and she opposes them.  And she sounds a further sad note: “My dad’s dying wish was to leave the Lakers to all of us, and that we would all get along. He would be sickened if he saw what was going on with my brothers.”

If Johnny and Jim achieve this end, Jerry Buss’s plan will have failed: although all of his children will be very, very rich (some estimates of the team’s value reach $3 billion), the championship family business will be neither, just four years after his death.  Forget passing it to the grandchildren - younger sons Joey and Jesse won’t even have a chance to run it.

Could better estate planning have avoided this outcome?  Maybe, but maybe not.

Jerry Buss was committed to putting Jeanie, the most able, and Jim, by some accounts his favorite child, in charge of the team and the organization.  This put them on a collision course if Jim, and the team, did not succeed.  If Jerry Buss believed he had built a bullet-proof team, he was proved very wrong.  He gave Jeanie the power to do what she did.  But he didn’t tell her when to exercise it.  Was Jeanie supposed to prioritize team success?  Or keep Jim in charge?  And for how long?

The season of Jerry Buss’s final illness (2012-2013) was one of the worst in recent years, with the team losing in the first round of the playoffs.  And the team’s performance only deteriorated from there, with the team’s win percentage dropping from .329 in 2013-2014, to .256 in 2014-2015, to .207 in 2015-2016.  By February 2017, when Jeanie finally fired Jim and Kupchak, the team was 19-39.

In 2014, Jim had promised, perhaps rashly, to have the team back in contention as a conference champion, by 2017 - or he’d quit.  But he was showing no signs of doing so, after the worst years in franchise history. Jeanie herself concedes that she waited longer than she might have for things to turn around under her brother’s leadership.  Knowing he was her father’s hand-picked successor made her decision that much more difficult. Jerry may have hoped for Jim's success, but his only plan in the event of Jim's failure was to have one sibling fire the other.

Another estate-planning pitfall is to expect adult children to work together more successfully after a parent’s death, than they did during the parent’s lifetime - when often the reverse is the case.  Jim and Jeanie’s track record of working together was not promising.  During Jerry Buss’s last illness, the siblings had a high-profile disagreement about choosing a coach, with Jim passing over Jeanie’s then-fiance Phil Jackson, a hugely successful former Lakers coach, in favor of Mike D’Antoni.  D’Antoni was hired November 11, 2012; Kupchak was deputized to notify him.  Jackson became the president of New York Knicks in March, 2014, and the romance failed to survive his move East.  The couple, who had been together since Jackson’s first season with the Lakers (1999-2000), ended their four-year engagement in December 2016.

Rather than spontaneously reversing itself, the rift between Jim and Jeanie only grew in the years following Jerry's death.  And as sports journalist Zach Buckley noted, “Jerry was more than an innovator, more than just the team’s final decision maker.  He was also the bridge bringing Jim and Jeanie together.”  No one could, or did, take his place in that role.

Jerry also seems not really to have anticipated the alliances that might arise between and among the six siblings.  With Johnny and Jim acting together, they outnumber Jeanie as trustees; but with Janie as committed as Jeanie to majority family ownership and control, the youngest two sons become tie-breakers.  Whichever side in the evolving dispute they take, if they stay together, they can sway the outcome.  A year ago, before it boiled over, Joey diplomatically sidestepped his older siblings’ conflict, telling the L.A. Times, “We’ve all agreed at this point to let Jim do the basketball and Jeanie's going to do the business. Right now, Jimmy’s under that timeline or whatever that he self-imposed. We’ll discuss what happens after that point when it comes. To say anything now, I think would be undermining Jim.”  It is hard to imagine Jesse, as scout for the Lakers, was any happier than his brother with the team’s recent results.

Back in 2009, before Jerry Buss became ill, the L.A. Times profiled the family, noting presciently, “Some fans are understandably nervous at the prospect of a generational transfer: The pro-sports landscape is full of stories of rich men leaving teams to their kids, only to watch infighting and mismanagement ruin the franchise.”  

The Lakers franchise is not “ruined,” though it’s badly bruised.  A month after Jeanie’s fratricidal shake-up, the team is at a dismal 20-49, dead last in the Western Conference, and out of playoff contention.  Although Johnny and Jim were frustrated in their first attempt to unseat her, the litigation continues, with a trial set for May 15, 2017.

So while Jeanie, Johnny and Jim fight it out in Superior Court, it falls to Magic Johnson, Rob Pelinka, and Luke Walton to turn things around on the basketball court. There are just twelve games left this season, but then comes the draft, and next season.  If the new leadership (and maybe a new coach?) is able to restore the team’s world-championship luster, the fans are likely to forgive and forget a few bad years.  It’s less likely the family relationships will bounce back so easily.