Family businesses make up 85.9% of all UK private sector businesses and 51% of the total private sector workforce. Given how common they are, you would think that working with family is a particularly harmonious business model. However, when your business partners are also your relatives, disagreements about business decisions often become entangled with personal relationships. This can lead to, sometimes bitter, disputes that can cause significant strain on both the business and the family.
In this article, Ian Haynes, Tax Director at Haines Watts Scotland looked at how to manage and resolve disputes in a family-owned company and the formal, corporate tools available to deal with the business aspects of any issues.
Why do disputes arise in family companies?
Even the best of families can disagree – and when business decisions are involved, tensions can rise quickly. Here are a few common reasons why disputes happen in family-owned companies:
- Power struggles: In many family businesses, ownership or decision-making is split between several family members, which can lead to conflicts over who holds the reins. When the voting power is evenly split, it can create a deadlock where no single family member has the final say.
- Different visions for the future: Another common issue is that different family members may have different ideas about the company’s direction. For example, some may prefer to focus on long-term growth, while others may want immediate profits or dividends to support their lifestyle.
- Succession planning: Deciding who will take over the business can lead to intense debate, especially when there’s no clear succession plan. Some family members might feel entitled to leadership, while others may not want to step aside.
- Personal tensions: Let’s not forget that families come with their own baggage. Personal grievances or past disagreements can resurface in business discussions, making it harder to separate emotions from decision-making.
Disputes like these can be damaging if not addressed quickly, potentially leading to disagreements that grind the business to a halt.
Deadlocks – why they happen and how to resolve them
Deadlock occurs when family members in a company can’t agree on a major decision, and no one has enough voting power to break the tie.
For example, in the case of a family-owned company where four siblings hold equal shares, two could vote in favour of a proposal while the other two oppose it. Without a clear majority, the company is stuck – unable to make key decisions, like whether to pay dividends or approve major expenditures.
Thankfully, the law provides mechanisms to address disputes in a corporate setting, particularly the Companies Act 2006 that family businesses can use to prevent or resolve deadlock situations.
- The Articles of Association: Every company has its Articles of Association, which act as a rulebook for how the business should be run. These articles can include specific provisions for resolving disputes, such as giving the chairperson a casting vote in the event of a tie. In some companies, the chairperson is an external person brought in specifically to provide an impartial decision in times of deadlock.
- Ordinary and Special Resolutions: A resolution is a formal decision made by shareholders. An ordinary resolution typically requires more than 50% approval, while a special resolution requires at least 75%. These resolutions cover important decisions like appointing or removing directors, approving dividends, or altering the company’s articles. The challenge, of course, is that when a family is evenly divided, reaching these thresholds can be impossible.
- Buy-Sell Agreements: A common solution to a long-term deadlock is a buy-sell agreement. This allows one or more shareholders to buy out another family member’s shares if they want to leave the company. This agreement can help avoid messy legal battles and ensures the departing family member receives fair value for their shares.
- Valuation and Share Buyback: If one family member wants to exit the company, a professional valuation is often the first step. This provides a clear understanding of what their stake in the business is worth. The company or other shareholders can then arrange a buyback of shares, ensuring the family member is fairly compensated without harming the business’s financial health.
Practical steps to resolving disputes
Once a dispute arises, it’s crucial to act quickly and pragmatically. Here’s a step-by-step guide to managing family business disputes before they escalate:
- Start with communication: Start with a family meeting where all shareholders can air their views. Although emotions might run high, keeping the discussion focused on business issues can help to clarify everyone’s position. Document the meeting carefully to ensure no misunderstandings arise later.
- Bring in an independent mediator: If the family members can’t reach a consensus on their own, it might be time to bring in an external mediator, such as an external accountant. This neutral party can provide objective advice and guide the family towards a workable solution.
- Consider an independent chairperson or arbitrator: Appointing a neutral chairperson with a casting vote is another way to break deadlock. This person could be a trusted advisor or an independent director, whose sole responsibility is to provide fair and impartial decisions during disputes.
- Explore alternative solutions: If one family member is keen to exit, consider options for buying them out. This could be the company buying back shares, other shareholders purchasing the shares, or even creating a separate company so the departing family member can go their own way.
Protecting your business – and your family
Family business disputes can be emotionally draining, especially when personal relationships are intertwined with business decisions. At Haines Watts, we’ve worked with thousands of businesses to help them build stable frameworks to protect the interests of their owners while providing scope for resolution of any issues that arise.
Our team brings a wealth of experience in guiding family-owned businesses through all kinds of situations, acting as neutral advisors and providing professional confidential and objective advice. To find out more about how we can protect your business, why not get in touch with our team?
