Dealing with family business disputes

The term ‘family business’ is a fairly broad one. It can include businesses run by married couples and multi-generational businesses that employ entire families and bloodlines and may be hundreds of years old. Family business, as a concept, can also elicit very polarised responses. Many people claim that they would never work with family or friends, while others categorically state that they would only ever work with family.

Business disputes are always stressful and disruptive but when it comes to family businesses, the emotional impact of a dispute is magnified and made more acute by the damage it does to the personal relationships too.

The common causes of family business disputes

In no particular order:

• Divorce. This is especially damaging when the spouses run their business together. Divorce often leads to the business being sold. But even with broader family businesses, divorce proceedings still have a major impact. This could be because the spouse of a family member was employed by the business or because the divorcing family member’s share of the business becomes the subject of financial settlement.
• Succession disputes. These usually occur when it is time for one generation to hand over the reins of a business to the next generation. This often leads to disagreements as well as disputes over the way in which family members not involved in the business should be accounted for.
• Performance issues. Simmering resentments over the perception that one family member is not pulling his or her weight can often erupt into a bitter dispute. This can be aggravated where the accused family member is receiving the same income or share of the profits.
• Setting up a competing business. A member of one business setting up a rival business will always lead to bad feelings even when the parties are not related. However, when a family member breaks off to start another competing business, then the sparks really do fly.
• Policy disagreements. As with conventional non-family businesses, disagreements between principals over the direction the business should take can prove corrosive to the point of destruction.

This is, by no means, an exhaustive list. Family business disputes can be caused by a wide number of issues from the economic to the personal and the ones listed above are merely the most common.

Preventing family business disputes

If the business is incorporated, then one way to mitigate the risk of disputes is by means of a comprehensive shareholder’s agreement. A well-drafted, solid shareholders agreement does not guarantee that disputes will not arise but having one in place may serve to concentrate minds and prevent things from spiralling out of control.

Alongside a shareholder’s agreement, the company should also have a tightly drafted set of Articles of Association.

If the business is unincorporated, then the partners should ensure that they conclude a partnership agreement which covers all the major issues such as how individuals will work together, how profits will be shared and provisions addressing the issues of partner retirement and expulsion.

In addition to a shareholders or partnership agreement, it is highly advisable for everyone involved in the business to have clear and well-defined roles, rights, duties and obligations. This can be done by means of a director’s service agreement or an employment contract in which all these things are clearly defined in advance.

There is no surefire or guaranteed way to avoid disputes. Parties can still fall out with each other but having a suite of well-drafted documents often helps to settle matters at an early stage.

Family business dispute resolution

As with all disputes, the first rule remains that a negotiated settlement is the best, least costly and least damaging solution. If the parties are on speaking terms, then the best thing they can do is agree to lock themselves in a room and refuse to leave until some sort of deal has been hashed out. It often proves helpful to the process of the parties if they have professional advisers with them in the room, provided those advisers are similarly committed to finding common ground and have experience in dealing with family business conflict resolution.

If the parties cannot bear to be in the same room with each other, then commercial mediation may be the next best option. An experienced commercial mediator is entirely impartial and can encourage and coax the parties in dispute to some manner of agreed settlement. The idea that drives the mediation process is to arrive at a point where nobody gets everything they want but everyone gets a solution they can live with. Commercial mediation will be more expensive than the locked-in-a-room method but it is still nowhere near as costly as option three, which is litigation.

If all else has failed, then the parties have the remaining option of taking their complaints to court and having them resolved by a judge. However, litigation can be ruinously expensive and it should only ever be regarded as a very last resort when all other options have been tried exhaustively and failed.

If you work in a family business in which a dispute has arisen, or may arise soon, then the best thing to do is seek professional advice at an early stage. Family business disputes are fraught with emotional issues that require not just experience and knowledge but also the degree of sensitivity required to help matters towards a speedy resolution whenever possible.

For further information and trusted legal advice regarding matters of family disputes , get in touch with our Resolution-accredited lawyers in London at Carlsons Solicitors.