LEGAL ISSUES WITH A FAMILY BUSINESS

The running of family businesses can often be more complex than other private company businesses. Stephanie Crease explores why this is and how lawyers can help deal with family business legal issues and avoid disputes.

Family business structure and governance

The role of the board of directors in a family business will be the same as any other business in that it will need to set out policies and short and long term plans to achieve success,  With a family business, succession issues add an extra dimension and there are often issues about who will do what on a day to day basis. Long term goals are often more important with family businesses.

In addition to a shareholders agreement we often find that a formally family charter document is important. This can set out in detail the intended objectives of the business and deal with key issues such as whether the business is intended to continue for future generations, rules about the possibility of selling the business or transfer or sale of shares by family members.

We are highly experienced in advising on, drafting or reviewing shareholder agreements, family charter documents or articles of association for family owned businesses. Discussing things and setting things out clearly at the beginning reduces the chances of a costly legal dispute later on.

Dispute prevention

Whilst any business can be subject to disputes between those who are running or owning it, the risk of a conflict in a family business is considerably higher. Whilst no-one wants to think that things will go wrong, it is sensible to think about what happens if there is a dispute in the future and how it will be dealt with. This is where a shareholders agreement and/or family charter can be invaluable. By clearly setting out in writing at the outset what has been agreed, tensions can be diffused by having a document to refer to. If there is a disagreement or dispute, having a clear mechanism for resolution, reduces the risk of costly and risky litigation.

Family businesses are also more vulnerable in certain areas than a non-family run business such as :-

• Management and ownership succession - will all family members be involved in the management or have a say in succession plans?
• Conflicts of interest - family members are likely to have a number of different roles e.g. as an owner, employee, director and possibly as a trustee if there are family trusts involved. Family members may not be involved in the family business on a day to day business and may instead be involved in potential;ly competing businesses.
• Payment of dividends to shareholders - some shareholders may be more reliant on dividends than others and to that end, consideration needs to be given as to whether any dividend policy is fair?
• A feeling of exclusion amongst those not working in the business due to a lack of communication or information about the business.
• The danger of the business operating on a closed basis without external input or suitable experience to diversify the products/services offered, to develop in a competitive market or to achieve an advantage over other businesses in the same sector.

As the business develops and families grow and change, the dynamics of the business will do so. It is therefore important to keep reviewing any family business arrangements and to ensure that those involved are all working towards a common long term objective, whilst dealing properly with the management of the business and the usual requirements imposed upon business owners to ensure continued success.

To discuss any of the issues highlighted in this article or for a more in depth discussion as to how we can help you ensure you have the right structure and documentation in place for your family business, please contact Stephanie Creasey.

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