Family disputes – what are your rights when operating a family business?

In our latest guest blog, John Osborne partner and Head of Family Law and corporate solicitor, Chloe Wishart teamed up with Karl Hodson, partner at UK Business Finance, part of the Begbies Traynor Group, to look at the disputes that could occur in a family business.

When disputes occur in a family business, the fact that it is family you are dealing with can make the situation more challenging. Long-held personal grievances can quickly surface, leaving you struggling to know what your rights are.

The rights and responsibilities of all shareholders are laid out in various business documents, including the company’s articles of association, employment contracts, and your shareholder agreement, if one has been made.

Although you may believe it unlikely that a serious dispute will occur within your family business, working closely with, and potentially also living with family members can create tensions from which you cannot easily escape.

What types of disputes typically occur in a family business?

These are just some of the common issues that lead to disputes in a family business:

Performance and input by certain family members

If a member of the family is perceived as not contributing to the business sufficiently, whilst taking an equal salary or the same share of the profits as others, it can create bad feelings.

When this is not addressed, it may escalate into a longstanding problem that becomes increasingly difficult to solve.

High director salaries

In a similar vein, a split may occur if family members who are directors are seen by those who are shareholders to be receiving excessively high salaries.

They may believe that the additional money leaving the company as salaries could be paid out as dividends to company shareholders instead.

Day-to-day business and strategic plans

Not everyone will agree to the plans for the business, and when the family is large conflicting views can stall growth and negatively affect the business on an operational level.

This is where it is particularly important to define who has the right to make decisions on behalf of the business, so its success is not jeopardised by conflict.

So how do you know what your rights are when running a family business?

Shareholders’ rights

Ordinary shares are typically issued by a company and the rights associated with these shares are set out in the articles of association. They generally mean the holder can receive dividends, take part in meetings, and they can potentially hold voting rights.

Family members may also hold preference shares, which offer them preferential rights in relation to dividends but may limit their voting rights.

Articles of Association

Articles of association are integral to the formation of a company and lay out how the company will be run. Crucially, they formally document the powers and responsibilities of the directors, and the articles can be bolstered by a shareholder agreement.

The articles of association typically detail shareholders’ rights and the rules for dealing with shareholder or director disputes. They can be reviewed and amended as the business evolves over time.

Some of the details within the articles of association may be the same as those in the shareholders’ agreement, as they cover similar areas. As long as there are no inconsistencies, however, they can run alongside one another to provide a complete record of your rights when operating your family business.

It is important to note when deciding whether to place certain provisions in either the articles or a shareholder’s agreement that the articles have to be filed with Companies House and are accessible to the public.

On the other hand, a shareholder’s agreement is a private document that does not require filing and can therefore, contain private business arrangements between the shareholders.

Divorce

Many companies are owned by shareholders who are married to each other. If that marriage breaks down, the family court will generally consider the company as a matrimonial asset to be divided in any financial settlement. They will often require it to be valued and for other issues such as tax and directors’ loans to be considered.

Taking advice from a specialist family lawyer will be essential at a very early stage in a separation. Such a step is also advisable where only one of the couples is a shareholder.

Shareholders’ agreement

A shareholders’ agreement can be made between all the shareholders, or only those with a certain class of shareholding. Its purpose is to define the rights and obligations of shareholders, with specific rules on how the company will be run and disputes resolved.

A shareholders’ agreement is tailored to individual businesses, and in the case of a family business, it is a vital document when disputes surface and disagreements threaten business success.

It might include a provision that prevents a family member involved in the company from setting up a rival business on their own, for example. If this was allowed to happen it could create serious financial problems for the family firm, not to mention a serious disintegration of family relationships.

Rights set out in employment contracts and directors’ service agreements

Employment contracts and directors’ service agreements offer another opportunity to set out each family member’s rights and responsibilities in relation to the business before disputes can arise.

Your role and that of your fellow directors/shareholders can be defined in detail within these documents, which can be used to support your actions and decisions if a dispute clouds the family business.

The consequences of failing to legally document the rights and responsibilities of all family members involved in your business are serious. It can cause loss of income, strained relationships, and ultimately a failed business.

It is never too late to act, however, and to put in place clear rules and regulations concerning your business. Doing so could not only save your business but also protect the good relationships you have with your family.

Article co-written by Karl Hodson, partner at UK Business Finance, part of the Begbies Traynor Group, who is responsible for helping businesses across the UK raise funding for a variety of purposes such as working capital, expansion and capital equipment.

If you would like to discuss any family business matters, contact our team of experts at Harrison Drury on 01772 258321.