If you’re in business with any family members, having this relationship as an integral part of the company’s structure can be a double-edged sword for a whole host of reasons. Whilst it may have many advantages, both practically and financially speaking, there’s also the very important consideration of what will happen if a dispute arises.
To help, our business dispute solicitors have created this article to help you recognise some of the common types of family business disputes, how they can be prevented and possible ways of resolving a conflict if such a situation does arise.
Contents:
Common types of family business dispute
Our business disputes lawyers tend to see specific situations where problems within a family business arise. These include (but are not limited to) the following:
- A family member sets up a competing business: Emotions can run extremely high when a family member who was previously part of the business branches out to set up another company in direct competition with the existing one.
- Unequal distribution of input (performance issues): Another scenario where feelings can escalate quickly is where there is a perception that a family member is not ‘pulling their weight’ in terms of the level of input they are putting into the business compared to others, particularly when they are receiving the same income and share of profits from it.
- Shareholder questions around director salaries: Sometimes it can be the case that as a shareholder, you may feel concerned about the level of salary the company directors are paying to themselves –because there’s a question mark about whether this is preventing money from getting through to you.
- Dividends not forthcoming: In a similar vein to the point above, as a shareholder, you might feel that money is wrongly being held within the company when it ought to be paid out as dividends where the company has made a profit.
- Conflicts of interest: These can arise over all manner of issues related to the business, ranging from the future strategic direction of it and the conduct of individual directors and shareholders all the way down to how the company should be run on a day-to-day basis.
- Succession planning: If there’s a lack of a clear succession plan, there’s a real risk that disagreements will arise when it comes to who will take over running the company when the person with overall control either steps down or passes away.
The impact of a family business dispute
It’s clear that the impact of a family business dispute can be significant for everyone involved in the company. Strained family relationships often lead to damaged trust and fraught communication between individuals in a personal context and in a professional context it’s no different. The negative effects on business performance can include:
- Decreased productivity
- Loss of key employees and customers
- Risk to business continuity
- A threat to long-term sustainability
- Potential for business failure
Because all of the above effects can prove extremely serious or even catastrophic for the company as a whole, it’s best to seek professional advice early to minimise the negative impact.
How to prevent a family business dispute
The good news is that there are ways in which you can minimise the risk of, or even prevent, a dispute arising in a family business. These can include:
Ensuring that there is a well-drafted, comprehensive Shareholder Agreement in place. Having a solid agreement in place is key to the successful running of any business with shareholders.
Running concurrently alongside the Shareholder Agreement is the need for equally well put together Articles of Association, which are an integral part of a company’s formation.
It’s a very good idea to ensure that everyone’s roles within the business are clearly defined as another means of preventing a dispute. If a family member is a shareholder or a director, you should clearly state what their role is in the business via the mechanism of a Shareholders Agreement or director’s service agreement. In addition to spelling out the shareholders’ and directors’ obligations whilst working as part of the company, any such document should also make it transparent what their obligations are following their departure from it.
If family members are working in the business as employees, putting written Employment Contracts in place reduces the risk of disputes and facilitates the swift resolution of any that do arise. In the absence of a contract, neither party has clarity on key matters such as their role and responsibilities, and the business has little protection against the family member setting up a rival business and taking staff and customers with them.
If the business operates as a partnership, it’s recommended that a Partnership Agreement is drafted which covers the key issues of how the individuals will work together, how profits will be shared and provisions on what happens in cases of partner expulsion and retirement.
If family members put money into the business, ensuring the terms on which they do so are fair and clear will reduce the scope for disputes down the line. While sourcing funding from family members can seem preferable to being beholden to a corporate lender, things can go badly wrong if you don’t give careful thought to how the arrangement will work beforehand. You’ll need to consider matters such as how the money will be repaid, the rate of return, and whether the family member putting up the money will receive a share of the business in return.
Not only will a formal loan agreement provide clarity on key issues, but it will also confirm that the arrangement was a loan rather than a gift. There have been many reported legal disputes involving family members disagreeing over the basis upon which money had been provided; a clear loan agreement can go a long way towards clarifying the parties’ intentions and facilitating a swift resolution.
How to resolve a family business dispute
In the unfortunate event that you find yourself facing a family business dispute, it’s sensible to take legal advice immediately in order to avoid incurring significant costs. There are often ways to resolve the conflict which can be discussed with a business disputes lawyer, who can help you decide on the best way forward to suit your needs.
Your business disputes lawyer will consider several factors when advising you on the dispute resolution methods that are appropriate in your case. For example, the business’s structure can impact your dispute resolution options. Say, for instance, the business operates as a general partnership. Unless your Partnership Agreement states otherwise, you would have no legal entitlement to carry out certain acts, such as expelling a partner. If you and the other partners want to expel someone, for example, because you feel they are harming the business, you’d need to try and secure their exit through negotiation.
Alternative dispute resolution (ADR)
Alternative dispute resolution (ADR) is very often the preferred means of resolving a family business dispute. If you choose to go down this route, it is often a relatively fast way to solve the problem in a mutually acceptable way and it is always a more cost-effective option than taking someone to court.
Mediation
Commercial mediation is another good option because the goal of the mediator is to encourage the parties to a dispute to move towards settlement. Having someone impartial overseeing the disagreement often, in the experience of our lawyers, leads to an agreed settlement between all of the parties and again, is usually more cost-effective than court action.
Litigation
If an agreement cannot be reached for any reason, litigation remains an option. This is typically seen as a last resort, and the court process is often the most expensive and time-consuming way of settling a dispute. It’s worth mentioning that the court will generally expect that all reasonable attempts to resolve the matter away from a full trial have been engaged with by both parties, and this principle is enshrined within the court rules, known as the Civil Procedure Rules (CPR).
Summary
A family business dispute is no different legally from any other business dispute and the same laws and principles apply. As touched upon above, the main difference is that these disputes tend to be more emotive so that as well as dealing with the legal issues there is the family dynamic to consider. Family members tend to avoid conflict for as long as possible and so if a conflict situation does develop, the issues are usually very serious: no one really anticipates such fallouts developing as business relationships are entered into when relationships are strong and outlooks are positive. Because this is why parties often haven’t turned their minds to think about what could go wrong later and haven’t put appropriate protections in place in the form of shareholder agreements/have taken the view that such agreements are an unnecessary expense, it’s imperative that the right legal support is enlisted at the earliest possible point if a problem rears its head. Above all, taking steps to put the protections mentioned in place first could prove wise in preventing disputes of this nature from getting out of hand.
