04 May 2023
Expansion & Improvement
Families are complex – family businesses can be even more so. The individuals behind a family business have many different roles, managing several relationships between domestic family relations, employees and clients, whilst ensuring that they manage the needs of the business together as working professionals.
Navigating conflict when it arises can be easier to manage if clear boundaries and plans are in place to govern what happens when business matters get personal. By creating the correct business structures from the outset (typically through the use of share classes and formal agreements) opportunities are created to decide matters of inheritance, control and decision making. Existing businesses can benefit from creating this structure with some additional planning.
Amy Robins explores the risks of conflict in family businesses and explains how the right structures and protections can help owners look out for the interests of the business and stakeholders.
What happens when family meets business?
Conflict can arise in any business, from disagreements over decision-making, power dynamics, and compensation. Common sources of conflict can include:
- Succession planning disputes: Disagreements over who should take over leadership when the current leader retires or passes away
- Differing visions for the business: Family members may have conflicting ideas about the company's direction, growth, and goals
- Inheritance issues: Disputes over the division of shares or assets among family members
- Unequal involvement: Resentment may arise when some family members are more involved in the business than others, leading to perceived imbalances in workload and rewards
- Compensation disputes: Disagreements over salaries, bonuses, or dividends for family members working in the business
- Generational differences: Clashes between older and younger family members regarding management style, company culture, or the adoption of new technologies
Divorce or marital issues: Disputes over the involvement or entitlements of spouses or ex-spouses in the family business
Proactive planning for family businesses
The goal of business structure is to provide legal and ethical frameworks for how a company is run – often with the interests of shareholders and customers at heart. In the same way, it can also help provide a framework for conflict resolution by deferring decision-making to objective statuses.
The key tools for this are:
- Articles of Incorporation: These define rights for each class of shares, powers to appoint or force the resignation of a director, matters requiring the consent of all directors and shareholders, circumstances in which shareholders may be permitted to transfer their shares and a dividend policy. We recommend the use of different classes of shares for each family member.
- Shareholder’s Agreements: A private document which can be used to dovetail the Articles to refine specific powers or decision making processes relevant to the company, including bespoke provisions and the restriction.
Structuring for conflict resolution
Creating tailored articles of incorporation and/or a shareholder’s agreement can help protect the interests of all members. Whether this is done at the moment of incorporation or later, planning for the governance of the business can help ensure smooth resolution of potential issues, including:
- Prioritising decisions: Having different classes of shares for each individual can allow founders to retain decision-making powers while giving younger generations a source of income.
- Managing exits: The Articles can govern operational issues and establish provisions for what happens when someone leaves the company. By setting conditions on the circumstances and timelines for pay-outs and share transfers, family businesses can pre-empt conflicts and avoid costly legal wrangling. This can also be achieved via a shareholder agreement.
- Compensation and share equity: It is possible to establish a dividend policy, ensuring that everyone is in an agreement in relation to profit extraction.
- Inheritance and business continuity: The death of a founder or major shareholder is always a significant personal blow, but without appropriate planning, shares can automatically pass to spouses or children, who may not be ready or suited to managing the business.
This agreement can also state that shares should be retained within the family, in the event of divorce. Whilst not legally binding, this would be a relevant consideration.
Private versus public governance?
It is possible to incorporate a shareholders agreement together with bespoke Articles. However, while Articles are public, a shareholders' agreement can cover many of the same issues while maintaining privacy as a shareholder’s agreement is not published on Companies House. In addition, private shareholder agreements have a higher bar for amendments, potentially requiring a 100% unanimous vote from shareholders to change, adding extra security.
Planning for the future
We work with family businesses to help them navigate the complex journey through growth, changing markets and new family circumstances. Beyond our compliance, tax and financial advisory, we work with the individuals behind the business to ensure that they can focus on the important things.
Many of our client relationships have endured through multiple generations and structures, as we help safeguard the interests of relevant stakeholders and the long term future of the business. Working together with our clients to grow is our ambition.
To find out how we can help you look out for your business and family’s future, get in touch with a member of our team today.