When professional becomes personal – protecting your family business from fallout

Carlyn Weale, a Partner in the Commercial Dispute Resolution department, and a specialist in family and SME shareholder disputes, shares insights on navigating the often-turbulent waters of family conflicts in a business context.

When disagreements arise, or worse, a full-fledged fallout occurs, the consequences can be devastating, both personally and professionally. Often a legal and emotional process of separating ownership and management interests, becomes the most commercial and logical step forward. In this article, we explore the pitfalls, preventive measures and solutions for handling these complex situations.

The Loss of Trust

When it comes to succession planning will siblings and/or step-siblings always get on? Far too often, family or small businesses operate on a foundation of trust and good intentions, neglecting the crucial step of establishing clear legal agreements. Without shareholder agreements, director service agreements or even documented board minutes, the business is vulnerable to conflict and confusion. When starting a business with family or friends, the formality of documentation is often forgotten or not considered necessary. After all, who expects to be in a legal battle with their loved ones?

However, as the business grows and evolves, so do the individuals involved and different perspectives and priorities often emerge. Perhaps a founder’s children or step children have contrasting visions for the company’s future, or a once amicable partnership between siblings sours due to personal disagreements or a divorce between board members occurs. Without clear documentation outlining decision-making processes, profit distribution and dispute resolution mechanisms, resolving these conflicts can become difficult.

The Commercial Breakup

When conflict reaches a breaking point, “a commercial breakup” may be the only viable solution. Just like a relationship breakup, it involves disentangling the parties’ interests in the business and finding a way to move forward. This can involve complex negotiations, valuations and potential restructuring of the company’s ownership and management – often requiring expert legal assistance.

Legal Strategies for Conflict Resolution

It is important that, despite the emotional and relational ties, when in conflict in family business or SME, that the board and shareholders keep commercially focussed. The majority of shareholder, board or partnership disputes can be resolved by a delicate balance of commerciality, empathy and legal advice.

Alternative dispute resolution methods like mediation or negotiation can offer a more amicable and cost-effective solution to protracted court proceedings. These approaches focus on finding common ground, tackling and narrowing issues at an early stage and preserving relationships, even in the face of challenging circumstances.

While litigation is ideally avoided, it is sometimes inevitable when parties are unable to find a way forward or agree the value or terms on which to separate or exit a business. Formal litigation may become necessary to protect interests, particularly in cases of deadlock, oppression or breaches of fiduciary duty. In such scenarios, the court can provide a fair and impartial forum to resolve disputes and enforce legal rights. Experienced litigation lawyers can play a crucial role in troubleshooting the issues and navigating the complexities of family business disputes, helping clients understand their legal options, develop a strong case strategy and advocate for their interests in court.

The Importance of Early Planning

A fallout with a business partner, especially a family member, is undeniably challenging. However,  with proactive measures and the right legal guidance, you can protect your business and preserve relationships.

The best way to avoid a protracted dispute is to lay a solid legal foundation from the start. This means implementing formal documentation that clearly outlines the rights and responsibilities of each shareholder and director. This includes:

• Shareholder Agreements – These agreements can address an array of potential conflicts, including decision-making procedures, profit distribution and share transfers. They can also provide a roadmap for navigating disagreements.
• Director Service Agreements – These agreements set out the terms of employment for directors, clarifying their roles, responsibilities and compensation.
• Regular Board Meetings with Minutes – Documenting key decisions and discussions creates a valuable record and helps ensure transparency and accountability.

While it may seem counterintuitive at first, having these agreements in place does not undermine trust. Rather, it demonstrates a commitment to responsible business practices, protecting the interests of all parties involved.

Facing a shareholder or board issue or want to protect your family business? Contact Carlyn Weale or another of our expert Dispute Lawyers.