Legal Considerations for Breaking Up a Family Business

Disputes within a family-run business can arise for several reasons. These reasons might relate to the specific nature of the business or the type of business structure a family has selected. Family businesses can also break for personal reasons, like the conduct of certain members. Disputes can even arise from generational conflicts between founders and children in the business, and between those active in the business and those who have taken more of a passive role. Ultimately, a family business dispute is emotionally taxing on everyone involved and, significantly, can raise serious legal and personal issues. This article will explain how to manage a fallout when members of a family business are no longer able to work together. 

Common Reasons for Family Business Disputes

Family businesses can fall apart for many reasons, ranging from business-related issues to personal problems within a particular family. Three common legal situations can cause family disputes, including:

• minority shareholder oppression;
• breach of a directors duty; and
• family deadlocks. 

Majority Control and Shareholder Oppression

In many businesses, one particular family member (or several members) often has control over most of the business. This can result in one family member holding more decision-making power over the others and, consequently, more impact over the other family members in the business.

This type of power division can cause a minority shareholder oppression. Minority shareholder oppression involves an action by the majority shareholder which is unfair to or contrary to the best interests of the minority. Further, a complaint relating to minority shareholder oppression occurs typically within closely held private companies, including family businesses. 

Breach of a Directors Duty

Directors owe several duties to their company. These duties include a duty to:

• act in good faith;
• exercise powers for a proper purpose;
• act with care and diligence; 
• not improperly use position or information; and 
• not trade while insolvent.

Directors who breach their director duties may face very serious consequences, including:

• being found guilty of a criminal offence; 
• paying a large fine; 
• being prohibited from managing any companies in the future; or
• being held personally liable for any company loss found to have been caused by their breach of directors’ duties.

Many problems can arise due to directors not understanding their rights and obligations. This is especially when directors and employees are all family business members where, sometimes, the line is blurred.

Family Deadlocks

A deadlock between directors or shareholders can arise from any kind of dispute over a business or company’s operations where the parties cannot agree on a particular issue. A deadlock over a specific issue can often raise tensions and have a flow-on effect on the company’s operation. Such a deadlock can be detrimental to the business. 

Additionally, a deadlock in the company’s management can be debilitating and, if the dispute worsens, may lead to litigation and even the winding up of the company. Therefore, a well-drafted shareholder agreement should always include ways to prevent a deadlock from occurring and also methods to resolve a deadlock if or when one arises. 

Tips to Minimise Future Problems

Conflicts with business partners are common, especially when you are related to them. Therefore, it is essential to be aware of the ways to avoid or minimise future disputes with your family business partners. Most importantly, well-drafted legal documents can prevent or help resolve a dispute within your business. Important legal documents to note include the: 

• shareholders agreement; 
• partnership agreement; and
• trust deed or operating agreement.

Shareholders agreements can cover everything from voting rights, rules on share transfers to long-term business objectives. When entering business with family members, a shareholders agreement is particularly useful because it is far easier to avoid disputes if everyone in the business knows what they are responsible for and understands their rights.

Additionally, there are other ways to handle and resolve family business disputes. For example, your family business may decide to appoint a custodian or provisional director. These professionals can be particularly useful in the event of a deadlock. 

Further, mediation can also be helpful. Mediation is a process by which a neutral third party (the mediator) assists parties who are in conflict to achieve a mutually acceptable outcome. This is particularly useful for a family business where an impartial third party is not related to anyone involved.

Key Takeaways

Family business disputes can arise on many subjects and can threaten the success and operation of the business and jeopardise family ties. To better protect the business, it is crucial to have good legal agreements in place. Make sure you maintain your director duties or keep the family member who is the director accountable. For more information on managing your business structure or drafting a shareholders agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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