Falling Out: how to avoid disputes and how to have difficult conversations

Disputes within family businesses can be caused by any number of issues, but common themes tend to be:

• Ownership;
• Division of responsibilities and roles versus reward;
• Hiring family members who are not qualified or lack the necessary skills;
• Succession planning; and
• Strategy, development, and growth.

Discussion, and sometimes even heated debate, within a family business is not always a bad thing. Often it can result in a good idea and, ultimately, positive development of the business. The trick is to encourage frank discussions, to manage the debate, and to harness the ideas, without coming to blows. Needless to say, where a dispute erupts within a family business, it can be hugely damaging to the fabric and reputation of the business, and to those that work for it. At worst, if a dispute escalates, it can result in costly and lengthy Court proceedings, which will inevitably be a huge distraction to the management, often brings the development of a business to a standstill, and can be financially crippling both for the business and for the individuals involved.

Our aim is to help family businesses succeed, and to avoid the pitfalls of disputes. Below are some suggestions, based on our experience, for steps that can be taken to try to prevent disputes from materialising, and to help resolve them at an early stage when they do arise.

Address 'taboo topics' head on

Taboo topics in family businesses often revolve around succession planning and ownership, particularly the transition from first generation to second generation, where the founder of the business is facing the prospect of handing over control, and possibly also a stake in the business, to the next generation.

Regular and structured meetings between the management, sleeping partners, shareholders and employees (both family and non-family members) help to ensure that people are kept involved and informed about the business, and that problems are identified at an early stage. It is often not appropriate for all issues concerning the business to be discussed at all levels, but it is important to minimise 'behind closed door' conversations wherever possible. If appropriate, minutes of meetings should be taken to ensure that there is a clear record of discussions and agreements for future reference.

You may also want to consider drawing up a non-legally binding family charter to set out the long-term aim of the business, and to help keep checks on the current and future management. A charter can be useful to focus minds on the goals and ethos of a business, and help to define the roles and expectations of individuals within the business.

Impartial Advisors

Where a dispute is brewing or it has already arisen, consider involving an impartial advisor (such as a lawyer, accountant or a mediator) at an early stage. The advisor can be tasked with, for example, chairing a meeting to ensure that views are heard and a debate can be had, which can help to take the emotion out of the discussions. It may also be that a third party (particularly someone with training in dispute resolution or mediation) can bring clarity to a discussion, or can see a way to compromise, or help to find an innovative solution.

Documents

Consider formalising agreements, structures and relationships within the business in legally-binding documents.

It is common to find that, having started from relatively modest beginnings, sophisticated and successful family businesses are run behind the scenes in a surprisingly informal way. So, while the business itself has grown, the internal governance and regulation have not caught up, and/or it has become outdated and irrelevant.

Ensuring that you have documents such as shareholders agreements, articles of association, partnership agreements, employment contracts and service contracts, which have been drafted by legal professionals, should help to minimise the scope for later dispute. Although this can sometimes seem like an unnecessary cost, ultimately these documents should make the business more stable and sustainable, by setting out clearly defined rules, rights and obligations to refer back to in the event of a dispute.

Once in place, it is important to ensure that these documents are kept under review and revised as appropriate to move with the development of the business.

Retirement and Estate Planning

Linked with the above, it is important that the terms on which someone can retire or resign from the business are clearly set out in a legally-binding document. Are they permitted to take cash or equity out of the business on departure? Will they have any on-going say in the business? Can they set up a rival business? These are all things to consider and agree in advance.

It is also fundamental that family members who own a personal stake in the business have a Will which deals with this, and that they have considered how their Will impacts upon, for example, minority and majority shareholdings and consequent management. Although you are entitled to keep the provisions in your Will confidential, consider to whether there is any benefit in explaining them while you are alive, in order to minimise the potential for surprise, dispute and potentially a challenge to your Will after your death.

Legal Advice

If a dispute arises within your business, seek independent advice as early as possible. You do not necessarily need to alert the other parties that you have done this (indeed it may inflame the situation if you do), but it is important that you are aware of your rights, your obligations if Court proceedings ensue, and what might be done to settle the dispute at an early stage.

If you require further information on anything covered in this briefing please contact Richard Lane ([email protected]; 020 3375 7548) or Elizabeth Sainsbury ([email protected]; 020 3375 7486), or your usual contact at the firm on 020 3375 7000.

This publication is a general summary. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2017