Business development · 15 May 2017

A guide to resolving family business disputes

family business disputes
Over a third of family business owners lose sleep over who will take over the reins when they retire

For the latest in his series covering all aspects of family-run ventures, Grid Law founder David Walker explains the best way to approach family business disputes.

When it comes to resolving family business disputes, people often say that preserving family relationships is more important than preserving the business.

What do you think?

Most people immediately think about their own family situation and agree. But is that right?

As with most legal problems, the answer isn’t that simple because family members must still comply with their legal duties as directors of the company and that can often go against family loyalties.

When the new Companies Act came into force, it introduced seven general duties for directors. Two of these are particularly relevant for family business disputes.

The first duty is that directors must promote the success of the business. In doing so, they must (amongst other things) consider the long-term effects of any decisions they make and the effect their decisions have on their employees.

Thinking long term is often an issue when there are rivalries within the family, for example, when there’s a dispute between generations of a family. With the benefit of experience, the elder generation resists the new ideas of the younger generation.

The younger generation, keen to make their mark, then gets frustrated with what they perceive to be slow progress or missed opportunities. They worry about the business getting left behind while the elder generation worry about unnecessary risks and this leads to a dispute.

Until the dispute is resolved, no decisions are made.

Another example is where there is a dispute between siblings. When they’re both vying for supremacy and aiming to be the natural successor to run the business, their decisions can be more about one-upmanship in the short-term, than what’s best for the future of the business long-term.

The employees of the business can be affected by the dispute in a number of ways. Not least if the decisions of family members puts the future of the business in jeopardy so there’s a risk that they could lose their jobs.

Non-family member employees can also miss out on opportunities and promotions in favour of family member employees, even if the family member isn’t best suited for the role. This also goes against the second duty and that is to avoid conflicts of interest.

Clearly, there is huge potential for a conflict of interest when family interests and business interests don’t match and the director needs to choose which one prevails.

I often see this situation when family members get into a dispute with a non-family member. Regardless of who’s right or wrong, the family member director automatically takes the side of the other family member. The family members all stick together to the detriment of the non-family member and the business in general suffers.

How to resolve family business disputes

Can you comply with your legal obligations and still do everything you can to protect family relationships?

As with all disputes, I’m very much in favour of communication. When tensions start to rise, try to nip the problem in the bud before it gets out of hand.

In a family business, it’s easy to ignore the early signs of trouble because you know it’s going to be awkward to deal with. But you mustn’t do this. You must tackle the problem and try to find a solution.

It sounds cliché, but you need to find a win-win solution because win-lose in this situation is a loss for everyone. Going back to the example I gave above about the dispute between the generations, the family members need to sit down and see if there is, for example, a way in which new ideas can be tested without putting the business at too much risk.

If the dispute can’t be resolved informally, mediation can work well.

Mediation is a form of alternative dispute resolution where an independent mediator helps both sides of the dispute find some common ground and a solution they’re both happy with.

The mediator isn’t a judge so they don’t say who is right or wrong. Generally, they won’t tell the parties what to do but if there is a real deadlock between them, they can often make helpful suggestions to break the standoff.

As with any business, it’s not going to be possible to avoid all disputes, but many disputes can be prevented if you have clear ground rules and an agreed common purpose to start with. I talked about this in my previous article – An essential checklist for setting up a family business.

When you’re in the middle of a dispute, it isn’t the time to look at these issues, but once things have calmed down it’s well worth agreeing some common goals for the business so everyone knows what they’re working towards.

Then, when a dispute does arise, you can look at these goals and they can help guide you to a solution that works for everyone.

If you’re involved in a family business and would like further information about resolving or avoiding disputes, please feel free to email me at editors@businessadvice.co.uk.

Catch up on the first article in the family business series:

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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