Family business: How to avoid disputes down the line
14 Apr 2023
Business Disputes, Business Law
There are many advantages to having a family-run business. Often there is a better cultural fit and common shared values, with a strong desire for success and loyalty to the business. Moreover, family members will make financial sacrifices by accepting a lower salary or deferring pay to help with cash flow.
Nevertheless, and as importantly, there is also a down-side. Sometimes family members are promoted despite lack of experience or skill – this can have a negative effect on the success of the business and in the retention of good staff.
Further, as so clearly exemplified by the hit TV series – Succession – family conflicts can lead to dysfunction and instability whilst at the same time necessary business decisions such as who will lead a business in the future can be a cause of contention if not properly managed.
Family business disputes when they occur differ to other types of shareholder disputes in that disagreements and breaches of duty, fiduciary, contractual or otherwise will have a personal and emotional impact. As with most things, transparency and accountability will help avoid disputes later down the line with clear succession planning and agreements to remove uncertainty.
One way of doing this is to have a shareholders’ agreement. This allows whoever is running the business to know their limitations and parameters and gives rights to those who have an interest in. These types of agreements provide protections around ownership to resolve differences early. In this way, costly litigation can be prevented – which has also been shown to have detrimental and traumatic impacts on family relationships. It is better in these types of situations that alternative dispute processes, such as mediation are carefully considered. This option is often built into shareholder agreements.
Aside from ensuring that key stakeholders are identified and protected, it is important that family businesses consider making communication a key priority – having regular updates for those not closely involved, making space for negotiation and for less dominant voices to be heard. A way this can be done is by having a charter – a sort of living document which can help steer disputes.
Moreover, finances can quickly become a cause of contention – with differences in pay, salary and remuneration; access to cash, who the risk bearers are and future funding of a business where not all members will have equal stake all being areas of friction. In this way a charter which identifies these issues will be helpful. Often, families operate on “trust” meaning that properties and businesses may be legally left in the names of some parties but are to be conducted for all members. These types of arrangements can quickly unravel during a dispute and should be properly documented.
Finally, post death documentation and safeguarding of family assets via trusts and in individual wills require a high level of communication. Individual family members may have individual preferences which might be different to the whole. It is useful to ensure that there are provisions in shareholder agreements dealing with business assets post death, and that distributions are not left to be dealt with via intestacy rules alone.
Overall, family business disputes differ to non-family disputes because of the emotional impact which may follow. By having legal documents in place, it ensures a greater level of trust so that relationships are preserved even outside of the joint business.
If you have any questions about family business disputes, please contact Bhavini Kalaria at Bhavini.firstname.lastname@example.org