There are over five million family businesses in the UK. Together, they generate almost a third of the country's GDP and employ 14 million people, around half of total private sector employment. They are the backbone of the economy.
Family businesses can have many advantages over purely commercial businesses such as stability, flexible management, dedicated relationships and a stronger commitment from its stakeholders. However, these qualities can also increase the risk that their members will become involved in bitter and costly disputes.
Conflict can often arise in family businesses where there are issues relating to succession, or inter-generational tension over the strategy and direction of the business. It is therefore important to recognise the risk of disputes arising, and if they do, try to manage them towards a positive outcome.
When things go wrong – dispute management
Each family business is different. However, the disputes that arise in family businesses commonly have three phases:
First phase – the trigger dispute
Most disputes about the running of the family business start with a triggering event. This is generally an underlying issue between the owners of the business which ultimately makes it impossible for those owners to cooperate in the management of the business.
Trigger disputes can include:
- misconduct by one of the owners / managers of the business;
- financial pressures which place a strain on the business, and by extension the relationships between the owners;
- strategic differences over how the business should be run, such as a desire for change brought on by the death of a patriarch / matriarch;
- personal animosity between the owners which develops into a dispute.
Second phase – the procedural struggle
The trigger dispute may eventually escalate to a stage where the parties lose all trust and confidence in one another and seek to obtain control of the business.
This is the stage where parties typically "go legal" by instructing lawyers to advise and assist. The "winner" of these attempts will depend on a number of factors, including how the business is structured, its constitutional documents, the effect of the relevant legislation and legal authorities on the parties, the parties' respective interests in the business, the value of the business; and the parties' resources and appetite to deal with the dispute.
In financially challenging times, such as COVID-19, parties will often pay closer attention to their opponent's conduct in the business. This will then be used to try and secure control of the business, both in the short term during the dispute and on a longer term basis.
Third phase – Court proceedings
If the dispute is not resolved in the second phase, then the parties will likely become entrenched and may issue court proceedings to obtain control of the business or seek an exit.
The substance and identity of the claimant(s) in these potential court claims will depend on the nature of the business and the interest of the claimant(s).
For example, if the business is a limited liability company and one of the parties is a minority shareholder, that party could petition the Court for relief on the basis that the company's affairs are being run in a manner that is unfairly prejudicial to their interests as a shareholder of that company. Alternatively, if the business is a traditional partnership and one of the partners is seeking to exit the partnership, then that partner could petition the court to require the other partners to purchase their interest in the business.
Avoiding a dispute
The complicated and bitter nature of family business disputes means that it is important to obtain legal advice at an early stage in order to manage and direct the dispute towards a resolution that limits costs and damage to a business.
Effective succession planning can help mitigate the risk of disputes arising, or its repercussions. It is important for owners of a family business to obtain legal advice on implementing such planning to better ensure it works and is tax effective.
Focussed succession planning, together with agreed mechanisms to resolve disputes that arise can save significant time and cost. Whilst it hoped that a dispute will not arise, it is best to assume that one will and plan accordingly.