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Families in dispute

It is important to have a plan to manage any disputes that may arise when running a business with family members

01 June 2020, at 8:45am

You can choose your friends but not your family. So, what happens if you run a practice with family – is trouble then guaranteed or will commercial harmony follow?

David Emanuel, chairman and a corporate law partner at VWV, thinks that every family business dispute will be different, but there are common themes, many of which are obvious. The most frequent tend to involve a lack of succession planning which leaves the next generation feeling frustrated or uncertain about what comes next and which of the next generation should be involved; differences over strategic direction – a family-owned lifestyle business or one that demands external management expertise at the expense of family members employed in the business; and different attitudes among or across generations on whether the business should stay in the family or be sold, and who decides.

But other issues can drive a wedge between family members, and some of them, reckons Philippa Dempster, managing partner of law firm Freeths, may be very trivial but can become significant. And money is often the root cause. She says “remuneration can often lead to a dispute if one family member feels that they are not being financially rewarded as well as another, or if they feel others are not pulling their weight in the business but being remunerated the same as those that are taking a key role in driving the business forward”. On top of this is what happens when one family member feels that they are not being included in decision making, however small that decision may be.

Dealing with the issues

As any good lawyer knows, documentation is key. For David, this could include an obligation in a shareholder’s agreement with mediation as a mechanism for resolving disputes. The reason for this is simple – “it is less adversarial, keeps the dispute out of the public eye and will generally be less costly than resorting to court action”.

And Philippa agrees, stating that alternative means of dispute resolution is always preferable “because litigation can be expensive and time consuming and is a distraction from the business”. Further, she adds that “if the key players in the business spend time on litigation the business will suffer as a result and the assets of the business start to dwindle as more and more money is spent on legal fees”.

This point is taken up by David. He suggests that if the family doesn’t want to bear the cost of mediation that an alternative “is an independent, respected, family-related figure – perhaps a trusted family lawyer or accountant, who may already be a non-executive director”. But as he explains, “the parties need to be in a frame of mind to mediate for this to have a chance of success. We have worked on family business disputes where mediation was being attempted at the same time as some protagonists were taking it upon themselves to shout at each other on their doorsteps late at night in earshot of their children. Needless to say, mediation was not successful.”

For Philippa, one prime benefit of mediation is that it will be felt outside of the practice – “it serves to preserve the family relationships [precisely] because it is a less aggressive approach to resolving the dispute”.

But before embarking on mediation, she emphasises that it’s important for the parties to know what their legal position is and the strength of that position. “Sometimes,” she says, “individuals can have a skewed view or perspective of their own case, especially when emotions are involved, and this is not helpful for mediation because parties become entrenched in their position.” She believes that by knowing, for example, that a court may not agree with a party’s position from a legal perspective (that it is weak), they will go to mediation with an open mind.

Risk management

The fact that disputes happen is a given, but families can lower the risk of trouble through a family charter which sets out the fundamental principles on which members want to see the practice run, and a shareholder’s agreement that offers detail on ownership and management rights and responsibilities. For David, these important governance documents can, he says, “help business and family relationships, and give confidence to face future challenges”.
Philippa sees similar value here too. She thinks a formal business plan should be written “so that the parties have some structure and each party is aware of the direction that is proposed for the business… Meetings should always be minuted to avoid misunderstandings down the line, with minutes circulated and if possible, an independent third party present.”

Both Philippa and David think that regular communication is critical. David advocates a “forum for family members to meet, away from home, to discuss family business issues in the context of their respective roles, whether as family member, employee or shareholder”. Philippa recommends openness where “parties can… be open and transparent with one another by, for example, having regular meetings to discuss company finances, business initiatives, staff issues".
It's interesting that anecdotally at least, David says that those family businesses which have remained successful into the second generation and beyond say that business comes first, however difficult that may be in personal terms. But from his perspective, problems don’t necessarily mean that a family member is cast out – “many longstanding family businesses find ways to involve the family through meetings and social occasions even where they may no longer have any association with the business beyond sharing the family name”.

It’s about people too

But what if there’s an irreconcilable disagreement? The solution – end game – will vary from family to family and depends on the priorities of each family member. As Philippa has witnessed, for some “family will always come first and for others money and success may be more important. We do see all too often families falling out over money and in those cases clearly the business is more important.”

But if agreement on business decisions cannot be reached then it is inevitable that one (or more) family members is going to have to exit the practice or it’s wound up. Here, says Philippa, any member wishing to exit will no doubt require payment for their shares – “the business will need to be valued (the same as it would be in any other shareholder dispute) so that the leaving party can either be bought out by the remaining parties or the company buys back the shares at value".

Of course, business isn’t necessarily about the current generation; it also concerns the future. Protection follows on from bringing in new family members at an early age to help them feel that the practice is very much part of the family. However, as David notes, to work in any business long term they need to have the right skills for their roles. Philippa thinks the same. Her advice is to get younger members of the family into the practice to shadow older family members – she says that it’s “a great way for them to learn what is involved with, and what it takes, to successfully run the business”. But she warns that shadowing alone may not be appealing to the younger generation “so it might be useful to give them small tasks, so they feel that they are contributing. As their confidence and competence grows, they can be given more responsibility.” And just as with the current generation, it is also important to reward hard work so that they feel their contributions are financially worthwhile.

In finishing, David notes that he has seen that “in larger, more established family businesses, the younger generation are often encouraged to find careers and build experience elsewhere, before bringing their external experience back to the family business”.

To conclude

So, while blood may be the strongest bond, it doesn’t guarantee success. The reality is that without a firm basis for good communications, an understanding of how a business is run and, ideally, good documentation, the seeds of destruction can be sown.