Managing conflict in family businesses

Directors are concerned with the running of a business day to day. Shareholders are owners of a business who make important decisions in relation to the company. How those decisions are made can all be outlined within a confidential document called a shareholders’ agreement. 

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between shareholders of a company that outlines how a business is to be operated. It also explains the shareholders’ rights and obligations. Having an effective shareholders’ agreement in place gives:

protection around ownership of the business

clarity and assurance to the procedures which the shareholders are to take to make decisions about the business.  

Essentially, such an agreement binds all the parties. It gives the usual remedies for breach of contract in the event a breach occurs. 

Shared ownership between family members can bring great value to a business. This can be especially true where family members have strong relationship ties and similar approaches to managing and growing the business. 

However, parties need to consider the risk of conflicts and a dispute arising. This is not due to disagreements during the course of business alone. It could also be due to potential marital breakdown or family conflict. This may then, in turn, impact the management of the business. 

It is fundamental that those going into share ownership together have the assurance of a predetermined framework in place. This helps to resolve situations amicably and to uphold family relations, given the emotional ties between the parties, as well as minimise any adverse impact on the business and/or individual shareholders financially. 

Cost of litigation – financial and emotional

Commencing proceedings can potentially be expensive, with even the successful party unlikely to recover 100% of their legal costs. Pursuing court proceedings can also be costly in terms of time and distraction to the running of the family business. Adding emotional involvement between the parties can unnecessarily prolong the litigation. It will usually not aid in resolving the dispute cost-effectively. 

For these reasons, it is advisable for parties to attempt to settle matters outside of court, to save on costs and to try to salvage relationships. Especially for a family business dispute, where there is the high risk of relations breaking down during a litigation battle.

Alternative Dispute Resolution (ADR)

Shareholders’ agreements can include provisions that oblige parties to adhere to a certain dispute resolution procedure in the event conflict arises. The advantage is that it gives the parties a clear structure of what to do should a dispute arise. Additionally, this can avoid unnecessary costs being incurred to rectify the situation and may help to preserve relationships. 

One common form of ADR is mediation. This is where a neutral third party (a mediator) aids parties to attempt to resolve their disputes. The mediator works with the parties to help achieve a negotiated settlement. There are many benefits to mediation such as confidentiality, speed, reduced costs, greater control and preserving relationships.  

This is why mediation is a great form of ADR when it comes to seeking to resolve family disputes in business.