Family businesses are not without their difficulties. In the event of a disagreement, it’s often difficult to keep personal feelings and business opinions separate. Below, we look at the issues inherent in family business disputes and how to resolve them.
Typical problems with family run businesses
In any business, there will be differences of opinion at board level but differences of opinion in family-run businesses can sometimes blur between business and personal. That is not to say all family run businesses are run like Ewing Oil (for the Dallas fan) but it is wise to map out how the decision-making process should unfold.
Quite often in family-run businesses, the parents may have set the business up and children may be coming through to take over the reins. This is not to say the children will have equal involvement or even enter the business at the same time. These variable dynamics can sometimes lead to heightened challenges for the decision-making process.
Problems at board level could arise due to the competing interests of the owners. For example, more senior shareholders may be less willing to take risks as they near the end of their working years and newer members may push for business risk to grow the business in a different direction.
The value of shareholders’ agreements
Shareholders’ agreements can cover everything from voting rights, rules on share transfers to long-term business objectives. When you’re in business with family members, shareholders’ agreements are particularly useful. It is far easier to avoid disputes later down the line if everyone understands their respective rights and responsibilities at the time they take shares in a Company.
Family or commercial advice; which is needed?
When setting up a family run business or granting shares to a new family member, the starting point will be to take advice from a solicitor specialising in company commercial law. It may mean that private client and taxation advice is also needed but a company solicitor will be able to identify these issues in the first meeting. For example, a senior, majority shareholder may need to put in place a business lasting power of attorney to ensure their role as a director can be executed by another if they are unable to do so themselves.
When disagreements arise in the family business, again, the company solicitor who advised on set up or who prepared the shareholders’ agreement should be the first point of contact.
A well-drafted shareholders’ agreement may include an agreed process for resolving disputes and in extreme cases, a right to take shares back from a dissenting shareholder or director.
Address problems early
We have seen some unfortunate cases where directors or shareholders are not contributing to the same level as other members of the family business but receive the same income and the same share of profits. Where this is not addressed it is inevitable that it may lead to unrest between the family members.
It is never too late to put in place a shareholders’ agreement, but it will be harder to enforce terms on someone who doesn’t want to change the level of their contributions. This is why agreements should be put in place at the earliest opportunity and not as an afterthought.
What happens if a dispute can’t be resolved?
If an impasse is reached and a key decision cannot be made, the parties to the dispute may consider forms of alternative dispute resolution, rather than court proceedings. Mediation provides for the parties to the dispute to meet with when a neutral third party mediator to air any issues and see if there is a way to reach a compromise. A mediator can be a solicitor; however, this is not always the case.
Benefits of mediation include:
- A forum where everyone can be open and honest about their feelings without prejudicing their position in open court proceedings;
- The guidance of an experienced mediator who will promote resolution whilst keeping negotiations calm and rational;
- It’s cheaper and less protracted than lengthy court proceedings;
- You may discover there are deep-rooted reasons for the conflict which have nothing to do with the business, and this makes it possible to resolve them.
Most importantly, once the dispute is resolved, you should draw up some goals and objectives for the business as a team to try to avoid similar disagreements happening again.
At AMD Solicitors, our team of solicitors in Bristol have extensive experience in advising family-owned businesses. For more information, simply call our team on 0117 973 3989 or fill out our contact form and we will get back to you as soon as we can.