‘A dispute of this kind can be more akin to a divorce than a commercial dispute, and this can have a devastating impact on the business if it is not resolved effectively,’ says Mark Blake, Partner and dispute resolution solicitor with QualitySolicitors Parkinson Wright. ‘Some family members might refuse to carry on working, or they might set up in competition to the original business. Alternatively, a disgruntled director can cause problems while working within the business and that could lead to business erosion or even failure if not dealt with effectively.’
Mark considers the types of issues that can arise, and how these can be resolved quickly to ensure minimum loss to a business and its shareholders.
Typical family business disputes
The family dynamic can bring significant benefits to a business. The trust and knowledge between family members can play a large part in its success. Conversely, when family relationships break down, the emotional impact can be far greater than between unrelated directors or shareholders.
One of the most common reasons for a family dispute arising is the subject of roles and remuneration. One might feel they are doing more than the others, but being paid the same. Or it may be that a director is overly controlling, or dominant, due to the family hierarchy. For example, if the business is run by the founder whose children have been brought into the business, the children may feel they have no real control or ability to make changes, such as through modernising or diversification. They might feel excluded from significant decisions and this will harbour resentment.
Sometimes shareholders will fall out over investment into the business, whether this is the source or terms of the investment or any shift in power as a result.
There are ways to prevent these issues from happening, such as entering into a well-drafted shareholders agreement which is clear on how money is invested into the company, or a written loan agreement can set out when and how much will be repaid.
Directors could also have a director’s agreement setting out what role each person is to take, and what remuneration is to be expected as a result. Similarly, the company’s Articles of Association could set out roles clearly. It might also be appropriate for directors to have individual employment contracts which clearly show what is expected of them, and what they can expect in return.
If the business is a partnership rather than a company, a good partnership agreement can help avoid disputes or at least say what is to be done should a dispute arise.
Unfortunately, like divorce, family members often do not believe that they will ever fall out, and so are less likely to enter into a shareholder or director agreement in advance. Even when there are agreements, they are not always kept up to date when new family members join or roles evolve.
Methods of resolution
If there are written agreements in place, they should set out how to resolve a dispute, which will often recommend that a method of alternative dispute resolution be used before resorting to court action.
Even if there is no agreement, or one is out of date, there will be options open to find a resolution before taking court action. Our solicitors will be able to guide you, once they understand your particular circumstances.
Mediation
Mediation is a facilitated negotiation process, which is confidential, where an impartial third party will help to settle a dispute between the parties. The mediator does not decide on the resolution, but helps everyone to try to reach a mutually acceptable agreement, which they may then agree is binding on each other. It encourages resolution by agreement and can be more cost effective and speedy than court action. It may also help the parties in a family dispute to reach agreement where they all feel comfortable, and may then be able to continue working together as a result.
Arbitration
This is a more formal process where both parties agree that an arbitrator, an independent expert in a particular area, reviews their positions and then makes a decision for them. The arbitrator’s decision will be legally binding on all parties.
Like mediation, this can be quicker than the court process. It is cheaper and is completed in private, so the dispute and its resolution can stay confidential.
Court action
If negotiation, mediation or arbitration do not work, or are not suitable in the circumstances, then it is open to the aggrieved person to take action in court to ask a judge to decide on the dispute. If a relationship has broken down and the parties cannot agree on another route, it is often the only option.
The grounds on which a matter can be taken to court will depend on the dispute. It may be a contractual dispute between directors, shareholders or partners where the terms of the contract must be interpreted and decided upon.
There are also options available for shareholders who do not have a majority shareholding and therefore cannot effect any change by their voting power.
If a voting block is not possible to achieve, minority shareholders also have certain remedies by application to court, as set out below.
Minority shareholder options
Unfair prejudice petition - if you are in dispute with family members about the way the family business is being run, and believe it is affecting your shareholding, you can bring an ‘unfair prejudice’ claim to court to say that you are being unfairly prejudiced by the actions of the directors and shareholders.
You will need to show how you have been prejudiced unfairly, and if the court rules in your favour, it can make any order that it thinks is appropriate in the circumstances. This might include ordering the company to purchase your shares, so you are released from your shareholding and are paid a fair value for them. Additionally, the company could be ordered to pay you damages for any loss you have suffered.
You will need to prove to the court that you have been prejudiced and have been unable to affect the remuneration via your existing voting rights.
Just and equitable winding up - this is a fairly drastic option that might be taken by a minority shareholder who believes the company just cannot continue any longer. It requires exceptional circumstances, as it will end the company if granted. If there is another suitable remedy the court will usually avoid this remedy, but it remains an option depending on the circumstances.
This may be the case if there has been a complete breakdown in mutual trust and confidence between the shareholders that goes beyond the remedies available to a minority shareholder in an unfair prejudice claim.
How we can help
A dispute among family members can be traumatic on many levels, taking an emotional as well as financial toll on the parties. We will work with you to resolve any family business disputes as painlessly as possible with the goal of, if not working together, then trying to maintain some sort of relationship with the family going forward. There are various remedies available and we will work with you to identify the best option.
Our solicitors have many years of experience in this area. For further information and assistance, please contact Mark Blake or a member of the dispute resolution team on 01905 721600 or via email: worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.