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Celebrations Can Make or Break Family Businesses

Celebrations such as Christmas and New Year are often times for catching up and spending more time than usual with family and loved ones.

However, with a significant proportion of us working with, or for, other family members in a family business – it can also be a time where business issues reach boiling point!

According to the Institute for Family Business, approximately 85% of UK businesses are family-owned, which the IFB estimates is around 4.8 million businesses.

While these family businesses can be incredibly successful, there will inevitably be situations where family members fall out. Managing these family disputes can affect the ability of the business to thrive, or even survive.

One of the key issues that will affect a family business dispute and how the business might continue is how the business is structured. The two most common legal structures for family businesses are partnerships and private limited companies.

 

Family Partnerships

As a partner in a family business, it’s important to remember that you owe fiduciary duties and must act in the utmost good faith to the partnership and the other partners. However, what happens if one partner breaches their duties? For example, if one partner unilaterally takes money that should have been accounted to the family business.

The starting point will be whether there is a partnership agreement between the family members that sets out the grounds for one of the partner’s departure.

If there is no partnership agreement and your family members cannot reach a commercial agreement for the transfer of the ownership of the business, then the default position is that the partnership should be dissolved.

A general dissolution of a partnership can have serious implications for the business and employees of the partnership, including:

  • Contracts of employment will be terminated
  • The partners will remain personally liable for the debts of the business
  • Does the property belong to the partnership business or the individual family member partners? This can obviously have a significant impact on the ongoing trading of the business if the property is the premises that the business trades from.

 

Family Companies

If your family business is a private limited company, there are various legal roles that should be considered. It’s quite common that family members of a company are directors, shareholders and employees of the company, at the same time. Each role as director, shareholder and employee has different (but sometimes overlapping) rights and obligations.

You should consider whether any potential claim rests with the company itself or the “innocent” family member? If the claim relates to breaches of their directors’ duties or duties as an employee, then it is likely that it will be for the company to bring the claim against the “rogue” family member. For example, they wrongfully commit the company to an extremely unusual or onerous contract.

Clearly, if the company becomes involved in an Employment Tribunal claim or Court proceedings for breaches of directors duties, then it is likely that there will be legal costs to be factored into any dispute.

If, on the other hand, the actions of your miscreant family member relates to breaches of a shareholders’ agreement, or amounts to unfairly prejudicing other family members’ minority shareholder rights (e.g. they seek to dilute your shareholding by issuing more shares to themselves, or they do not pay dividends to you where you are entitled to the dividends), then it will be for you and other innocent family members to bring a claim in your own names.

 

Other Issues for Family Businesses

By their very nature, family businesses can often involve parents, grandparents, siblings, children, etc. If there is an inter-generational family dispute, it may be necessary for you to review and update your Wills and any other estate plans you have in place. More generally, a family business dispute can significantly affect the relationships with the other members of the family.

All of the above means that family business disputes are required to be taken very seriously. It can be extremely helpful to take legal advice regarding these disputes at an early stage to attempt to prevent the disputes escalating unnecessarily and potentially impacting on the business itself.

 

For advice on any potential or current family business or general commercial dispute, please contact Gordon Monaghan on 0115 9 100 248 or click here to send an email.

If you’re thinking of starting a family business and you’d like advice on the most appropriate business structure for your family circumstances, please contact a member of our Corporate & Commercial team on 0115 9 100 200 or click here to send an email.

Posted on January 9, 2020

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