This article intends to highlight a few common issues that often arise in family-owned businesses, provoke thought and debate on those issues and offer some guidance. A follow up seminar will be held on 12 September at our Norwich office in which we explore these issues further, using the below scenario as a case study to provide context and facilitate discussion.

Scenario

Company X, a family business owned by a father and two sons (all directors) encounters difficulties when the father, the majority shareholder, falls ill and no longer has capacity to make his own decisions. The first son is heavily involved in the day to day running of the business with little or no input from the second son. Company X has only one type of share in issue and no formal legal documentation exists to govern the relationship between the parties.

Challenges

The above scenario presents many common problems faced by family businesses including succession, control of the company and how to deal with inactive directors and troublesome minority shareholders.

The recommendation of our family business team when starting a family business is to think beyond family relationships and blood ties and formalise the relationship between members in the form of a written agreement, such as a shareholders agreement or employment contracts for different members. This process promotes discussion on key, often tricky, areas and helps create certainty and stability. Although there are solutions available without the formal paper work in place, these can often be time-consuming, risky, expensive and increase tension between the parties. Some possible solutions are set out below.

Solutions

There are provisions to allow shareholders to remove a troublesome director under the Companies Act 2006 (Companies Act). However, such a move requires an ordinary resolution (i.e. over 50% of the vote). In this situation: not straight-forward. If the father has granted a power of attorney then the attorney may be able to exercise their vote to remove the errant director. However, among other factors, the attorney would need to be satisfied that they were meeting their fiduciary duties to the father.

An alternative may be to issue more shares to the first son to give him a majority of the shares. However, this depends on the provisions in the articles as, under the Companies Act, there are pre-emption rights which are intended to prevent one shareholder swamping the others. In addition, the majority shareholders could open themselves up to a minority prejudice claim.

Removing a minority shareholder is often harder to resolve, takes more time and as such can prove costly. Our team of family business specialists recently negotiated a hostile sale of shares from an inactive member. It was an expensive deal where the team had to persuade the minority shareholder to part with his shares in the company, something that family members are often reluctant to do due to their emotional attachment to the company.

Conclusion

Corporate governance and succession is not always straight-forward and so a formal agreement along with a well-drafted set of articles specifying the roles of individual members and the rights attached to their shares would help avoid the above issues. Our team of family owned business specialists are well placed to provide bespoke solutions to help your company overcome problems and continue to grow and flourish. We look forward to seeing you at our seminar where we will explore these issues further.