Legal Matters Q&A – Family Business
John Wiblin, Partner and Head of Despite Resolution, talks about some of the legal issues that can arise within family businesses and how to avoid them.
Q1: How are you involved with family businesses?
A: I usually get involved when a dispute arises between the owners of the business. My other colleagues at Longmores may be involved in setting-up businesses, preparing their shareholder agreements and other corporate governance papers, and in succession planning for the business as older family members want to retire. And our employment team has a role to play too because family members may be employees of the business.
Q2: Are any legal problems unique to family businesses?
A: All businesses need to be set up correctly and any business can have a dispute with their employees or have its owners fall out between themselves. The family dimension can mean that there is a reluctance to talk about these issues before any problems arise. It means that if there are problems, the repercussions can be very difficult for everyone, even those family members that don’t work in the business because in these circumstances individuals tend to choose sides quickly.
Q3: What legal problems are most common for businesses of this kind?
A: The most common issue is that insufficient plans have been made about who will take over the business when older family members retire or if one of them passes away. In the case of a traditional partnership, unless measures have been put in place in advance, the partnership is liquidated automatically when one of the partners leaves or dies. With companies, shares may pass to the spouse of a director who worked in the company but the surviving spouse may have no experience of the business.
Q4: Can anything be done to prevent these problems?
A: A shareholder agreement or partnership deed entered into at the outset and updated regularly can address most of these issues. As can keeping stakeholders in the business apprised about what is likely to happen in future. Many difficulties have their roots in a difference between expectation and reality. And it’s hard on people when expectations that have been relied on for years are suddenly dashed. Harder still when it’s done by a family member.
Q5: What sort of ‘expectations’ do you mean?
A: That someone will become a director, or that the business will be sold or not, or that shareholders are guaranteed a consistent income. Any business can have a period of bad trading or when it needs to keep capital in reserve to meet a new challenge. In those circumstances, directors have a duty not to declare a dividend. That can be difficult when they have family members who rely on receiving those funds.
Q6: What is it like to act for family members in bitter disputes?
A: It is hard to avoid taking on some of the stress that clients feel when they are under pressure from other parts of their family. But it can be rewarding too because I know the input I provide makes a difference to people. I am often the only person outside of the family with whom my client can discuss matters and get a different perspective.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.