After the 2008 financial crisis, academics found that family businesses had consistently lower insolvency rates than other companies – early evidence would suggest that they have again fared well during the Covid-19 crisis. However, the pandemic has put stress on everyone, and whilst the businesses themselves may be resilient, legal disputes in between owners of them are on the increase.
Whilst disputes arise between the owners of all types of businesses, those involving family companies can be particularly fractious. The added dimension of the family relationship can add to the usual pressures felt between co-owners, multi-generational aspects may come into play, or underlying frictions between siblings – perhaps from different marriages – can create board or shareholder division. Those pressures can be amplified during periods of business stress, such as those faced during the present crisis.
Disputes between family co-owners often have different causes to purely commercial business partners. For the commercial owners, perhaps joint venture parties or institutional investors, the disputes are far more commercial in nature, often revolving around failure to deliver on promised outcomes or conflicts with parallel business interests. For the family shareholder the drivers tend to be more personally focussed. Several key causes spring to mind:
Direction of travel
Because family shareholders are usually closer to the businesses with greater emotional attachment, the aims and strategy for the business can appear far more relevant. One group of shareholders may want to pursue growth, whilst others want to focus on consolidation and income. Whilst some may have development aspirations, others may be looking for an exit event to release capital to the shareholders. Those ideals are often informed by the life-stage of the relevant shareholder and this is particularly so in multi-generational companies. Over the last 12 months, law firm Ashfords LLP has seen a number of disputes where the difference of opinion has concerned the business strategy to address Covid, with shareholders and board members having widely differing views as to the route to be adopted to face the challenges. Investment into the adoption of revised business models to address alternate routes to deliver services to market vs a preference to ‘wait out’ for a return to normal market conditions has been a recurring theme.
Retirement and Handover
This is a fertile area for dispute and one upon which the focus has again been switched during more challenging trading conditions. In these disputes, 2nd or 3rd generation shareholders often await the retirement of the senior generation, to fully hand them the reigns of the company. The junior shareholders have often put in many years of service and are hungry to progress the venture under their stewardship, perhaps with fresh ideas and drive. The senior shareholders, are often reluctant to let go, perhaps fearing their offspring are not quite ready, or are simply finding it hard to let go of their life’s work or maybe needing the income the role provides. When business conditions are challenging, there is often an increased desire to ‘trim costs’. The senior shareholder, who may have divested him or herself of shares in the run up to retirement, can be left exposed. If moves are made to seize control it can polarise the position between shareholders often leading to both family and board room rifts.
Reward
Often in a family company situation, shareholders may be rewarded by a mix of salary, bonuses and other benefits (for working shareholders) and dividends (for working and non-working). When the businesses are trading normally (and as long as levels are set appropriately) the efficiency and flexibility this provides can usually work well. When market conditions alter, as with Covid, this can skew rewards. In challenging conditions the board might elect not to declare dividends or employed staff may be furloughed. Any alteration to reward structure has the ability to cause friction and therefore dispute.
The ‘Cynical’ Dispute
This is perhaps the most interesting ‘trigger’ – and whilst not exclusive to family company disputes – commonly arises in this scenario. The most common outcome of a shareholder dispute is the acquisition of one shareholder’s shares by another shareholder or group. This might arise under powers contained in the Articles, in a shareholders agreement, by negotiation or pursuant to a court order (typically as a result of an unfair prejudice claim). Share value will usually be determined by a mechanism in a contractual documents (e.g exit provisions in a shareholders agreement) or by a determination upon direction of the court.
In almost all cases the ‘price’ is driven by the market value of the shares and in challenging economic times, those market values are often suppressed. It follows that a downturn can present a unique opportunity to a controlling shareholder to exercise any acquisition options or to ‘force out’ others and to acquire their shareholdings at a competitive price – thus ‘cynical’ disputes often arise as controlling shareholders seek to take advantage of market conditions.
In all shareholder disputes, but particularly family disputes, early intervention is the key. Early stage mediation is becoming increasingly popular in identifying and addressing areas of disagreement before positions become polarised and formal disputes occur. Lawyers or accountants should be consulted as early as possible to assist in addressing and understanding difficulties – these are certainly not circumstances where ‘keeping it in the family’ is the best approach.
Author: Andrew Perkins, Shareholder Dispute Lawyer at law firm Ashfords LLP
