The causes of family business disputes and how to resolve them

Going into business with family members has numerous advantages. Everyone involved will usually be heavily invested in making the venture a success. They often have shared values, trust one another and view the business as a long-term prospect. However, family businesses can also be an intricate web of complex relationships and difficult dynamics and, as such, are sometimes breeding grounds for conflict. 

In this article, Liz Black, senior business dispute solicitor at Harper James, discusses the common reasons family business disputes occur and the options available to individuals involved in a dispute. 

Why do family business disputes occur?

Since every family is different, so are the reasons for a family business dispute. However, most arise from a simple failure to properly document the nature of the members’ roles and responsibilities and an under-appreciation of the need to plan ahead.

Some of the main causes of family business disputes include:

Poor succession planning

Careful succession planning is key to the ongoing success of a family business and ensuring its smooth transition to the next generation.

Succession planning can be a thorny subject, necessitating difficult conversations and potentially causing disappointment. Competing aspirations, differing abilities, and conflicting visions for the future can create considerable tension.

As a result, many family business owners place succession discussions on the back burner, thinking they have ample time to address the issue or simply ‘hoping for the best’ in the event they suddenly become unable to lead the business.  

However, the consequences of poor succession and leadership planning can be catastrophic. Without a clear plan for the future, internal power struggles often erupt, resulting in a hostile working environment and unmotivated employees. Control may be taken by less competent individuals, causing those who are better qualified to leave the business, taking their invaluable commercial know-how with them. The financial impact on a family business can be severe, sometimes placing its future in jeopardy.

Lack of proper Shareholders’ Agreement 

An effective Shareholders’ Agreement is crucial to the effective running of a company. It regulates the members’ relationships by defining their roles and responsibilities and the extent of their ownership. Crucially, it can safeguard the shareholders’ interests when things go wrong by including a mechanism for disputes to be resolved (or prevented in the first place).  

The often-informal nature of a family business means that the necessity of a Shareholder’s Agreement can be overlooked. As a result, there is no document stating how the members intended to work together or address any disagreement. Protracted disputes can ensue, sometimes resulting in an impasse. In worst case scenarios, the situation can lead to a deadlock, with the only option being to wind up the company. 

Participation 

Clearly defined roles and boundaries are essential to the smooth functioning of any company but are particularly pertinent in family business situations. Cracks can appear if it is perceived that one family member is failing to pull their weight, or if a member feels that they are not afforded the same level of participation as others. When the extent of each member’s input is not clearly agreed upon, understood and adhered to, disagreements often surface.

Allocation of funds

Not all family members are directors and shareholders of the family company. Some may be content to take a more passive role, leaving the day to day running of the business to others. Sometimes, though, they may become unhappy with the director’s salaries, considering them excessive, or feel that the dividend paid is too low. The allocation of funds is one of the most common causes of resentment within a family business.

How to resolve a family business dispute

The options to settle a family business dispute are the same as with any other commercial dispute. 

They include:

Negotiation

It is always preferable to settle a business dispute as quickly and amicably as possible, and never more so than when it involves family members. Sometimes, setting time aside for open and honest dialogue between the parties can help them to articulate their positions and discuss how the issues might be resolved. 

Mediation 

Mediation is a form of ‘alternative dispute resolution’. It is a process through which the parties seek to resolve their issues with the help of an independent third party, the Mediator. 

Mediation is widely used in the context of business disputes, with excellent results.  It has numerous advantages, including:

• It can preserve the parties’ business and personal relationships in a way often not possible when the parties become embroiled in litigation.
• It is quick, often taking just a few days to organise.
• The parties have complete control over the time, venue, choice of Mediator and format.
• It is less formal and, as a result, less stressful, than litigation.
• The parties can settle their disagreement on terms reflective of their commercial reality and family relationships.

On the downside, the disadvantages of Mediation include:

• Whilst the Mediator can guide the parties and encourage settlement, nobody is legally obliged to engage with the process.
• There is no guarantee that the matter will be resolved.
• The process involves no consideration of the merits of either party’s position. 
• There is no formal requirement that the parties disclose material relevant to the dispute ahead of the Mediation so each party must trust the other’s good faith.

Litigation 

Sometimes, a dispute is too deeply entrenched to be capable of settlement other than through litigation. In these cases, the outcome of the Court proceedings can shape the fate of the family business and dictate who will be involved in its future.

Whilst litigation is often considered a last resort, it does have several advantages, including: 

• The litigation process compels the parties to disclose all documentation that may have a bearing on the issues.
• The Judge will consider the merits of each side’s position and make a Judgment based on the facts.
• Crucially, litigation delivers a clear outcome that cannot be disputed.

The disadvantages of litigation are well documented and include:

• It is lengthy and expensive. Cases sometimes take years to get to trial and the costs can be prohibitive.
• The outcome is inherently unpredictable. Whilst legal advisors can give guidance on the strength of each party’s case, the result is dependent on the individual Judge’s interpretation of the evidence and, ultimately, whom they believe.
• Once a family has embarked on litigation, it can be impossible to rebuild their relationships.

Conclusion 

Going into business with your family can be extremely rewarding, both personally and financially. However, family businesses present unique challenges that can lead to discord if not addressed from the outset. It is crucial to take proactive steps to regularise each members’ roles and responsibilities and minimise the chance of future conflict.

Formal documentation such as a Shareholder’s Agreement is vital, regardless of the personal nature of the members’ relationships. In addition, fostering a collaborative environment that draws on each member’s strengths, values their input and rewards them accordingly will go a long way towards maintaining solid family relationships and enhancing commercial success.