Family business disputes: How to resolve conflict

In the words of F. Scott Fitzgerald, “family quarrels are bitter things.  They don’t go according to any rules.  They’re not like aches or wounds, they’re more like splits in the skin that won’t heal because there’s not enough material”.

When these quarrels extend to the family business then lawyers tasked with resolving such disputes need to understand the family dynamics if they are going to find a resolution to the problem.

Family businesses come in all shapes and sizes.  From small farming partnerships to large established companies.  Despite this diversity there are some common themes.

They are much more likely than other businesses to have unwritten rules or understandings about how the business should be run.  Examples of the sort of understandings which are often seen are that:

• family members will have right to be involved in the business,
• the business will be viewed as for the wider benefit of the family, not just for those directly working within it,
• there will be a focus on dividends or income to be distributed to the wider shareholders in a company,
• that family members working in the business can expect to inherit a larger proportion of the business in due course.

Sometimes these understandings are set out in formal documents.  Often it is left as a matter of custom and practice within the family business.  This is when problems are most likely to arise.  First, the absence of documentation can create disputes owing to differences of opinion as to the principles underlying the business and secondly, the courts can be a blunt (and expensive) tool when it comes to finding a solution.

Common causes of disputes within family businesses are:

• the exclusion of some family members from involvement in the business,
• issues around dealing with underperforming family members,
• disagreements about whether the focus should be on short term profit or long term capital investment (often setting the older family members against the younger),

A recipe for disaster in small family companies can be for the founding parties to leave their shareholdings equally to their children, regardless of their aptitude for, or involvement in, the business.  Unless the children genuinely all share the same vision for the business then you risk deadlock (if there are only two siblings) or the siblings holding the majority of the shares ganging up and riding roughshod over the minority.

In such cases the two main solutions using the court process are:

• the compulsory purchase by wrongdoing shareholders of another shareholder’s shares (via what is known as an “unfair prejudice” petition), or
• the compulsory winding up of the company (on a “just & equitable” basis).

In each case the court will look at all of the circumstances of the matter and seek to arrive at a fair outcome.  Where there are no clear written agreements then this inevitably involves a large amount of witness evidence, often going back over a long period of time, for the court to understand what agreements exist.  There is no concept of a “no fault divorce”, meaning that somebody has to be at found at fault to either prove or disprove unfairness.  This means that the evidence will often involve a lot of mud-slinging between the parties.  Long buried resentments between siblings can re-surface which can make resolving disputes very much harder.

Such litigation is very expensive and it can be notoriously difficult to predict the outcome.  For this reason alternative dispute resolution (ADR), and in particular mediation, should always be considered.  ADR is proven to be highly effective in this context and is positively encouraged by the courts.

Mediation is a process under which a neutral third party, the mediator, is employed by all parties to help them reach a negotiated settlement.  The mediator facilitates the discussions, and a good mediator can help defuse situations, get the focus away from the personal and help the parties target a commercial outcome.  The mediator does not come to any decisions and if no settlement is reached then the parties simply walk away.

In summary, the family dynamic can create strong and successful businesses.  However, the personal nature of relationships within families can also cause businesses to be torn apart.  By the time it gets to court positions may be so entrenched and parties may be so bitter that all commercial sense can go out of the window.  This can make resolution of any dispute that much more difficult to achieve.

The art of a lawyer experienced in family business disputes is to understand these dynamics and seek to resolve any dispute via mediation or negotiation, before it gets to court.

This is the expert field of Ed Weeks, a partner in our commercial disputes team.  The second edition of his book – A Practical Guide to Shareholder Disputes in Owner Managed and Family Businesses – has recently been published.  For those involved in a shareholder dispute, or tasked with advising on one, it is valuable distillation of 25 years’ experience helping people in warring family businesses find a solution.