FREE CHAPTER from ‘A Practical Guide to Shareholder Disputes in Family Businesses’ by Ed Weeks



All businesses are ultimately defined by the people who work in them. What makes family businesses different are the ties between members which extend beyond the typical commercial and business relationships.

This can make resolving disputes between the members of the business more difficult and also has an impact on the legal and practical issues that can arise.

This book is written from a lawyer’s perspective and hence the focus is on the law. However there are three elements which are relevant to understanding family business disputes and which are equally important:

  • Law

  • Psychology

  • Commercial context

Anybody tasked with resolving such a dispute must understand the inter-action between these three elements and in particular must never under-estimate the importance of the psychology of those involved.

In the words of the author F. Scott Fitzgerald:

Family quarrels are bitter things. They don’t go according to any rules. They’re not like aches or wounds, they’re more like splits in the skin that won’t heal because there’s not enough material.

There are also a number of practical differences between family companies and non-family companies. Those which are relevant to the likelihood of disputes and to the approach which may need to be taken to achieve resolution include the following:

  • There are more likely to be understandings and agreements outside of the formal company structure or governing documents.

  • It is more likely that shareholders will have an elevated sense of ownership and expectations about their entitlements.

  • There is greater potential for directors or employees to have been appointed to roles above their capabilities.

  • From a technical legal perspective such companies are more likely to be what have become known in legal shorthand as “quasi-partnerships”.

  • Issues around succession can either be the direct cause of disputes or be a contributing factor, heightening emotion and ill-feeling between the parties.

These elements, and the issues and elephant traps that arise from them, will be explored further in the following chapters.

The causes and nature of disputes within family businesses are as many and varied as the businesses themselves but there are some common themes:

  • Disagreements over the direction of the business, in particular whether it should be seen as a long-term income generator as opposed to there being a planned exit route to realising the capital in the business by sale in the short to medium term.

  • People not pulling their weight. Sometimes this can relate to a shareholder appointed to a role beyond their capability but more often it is the result of shares being left on death by a parent to all siblings, regardless of whether they take an active role in the business. Resentment can build in those actively involved in the business when they feel they are doing all the work but having to share the reward.

  • People feathering their own nest. This is the reverse of the previous theme in that the non-active shareholders believe that those controlling the company are preferring their own interests over the company and the wider group of shareholders.

  • Inter-generational conflict. This can occur where the shares are held by different generations who have different priorities and consequently different expectations about the future of the business.

  • Sibling rivalry, plain and simple. Sometimes the cause of a dispute has its roots in childhood rivalries that re-emerge or have never gone away. These can be some of the hardest disputes for a lawyer to resolve.

The nature and cause of the underlying dispute should be sought to be understood at the earliest possible stage as it has an impact on the appropriate dispute mechanism and the ultimate chances of that mechanism being successful in resolving the dispute.

In terms of mechanisms the principal ones are, in ascending order of complexity and cost:

  • Informal discussion and negotiation

  • Facilitated negotiation

  • Mediation

  • Expert determination

  • Litigation / Arbitration

In terms of selecting an appropriate dispute resolution mechanism, those tasked with resolving a dispute should first identify the stage which the conflict has reached. Friedrich Glasl, an Austrian economist and leading authority on conflict, has created a model which identifies three main stages as follows:

  • Win-Win – the parties are engaging, disputes are mostly factual and negotiation, facilitated or otherwise, is the right mechanism.

  • Win-Lose – positions have become entrenched, attacks are more personal and the conflict is more about the relationship. At this stage a more structured negotiation (e.g. mediation) is likely to be required.

  • Lose-Lose – it has reached the stage where parties are using the language of war, are willing to incur losses as long as their opponent loses more or even are ready to destroy their own position to take down their opponent. When it has reached this stage it is likely that only the intervention of a third party making a decision (i.e. Judge), or at least the credible threat of this, will lead to any resolution.

In family businesses the nature of the relationships between the parties can often mean that there can be an accelerated progress through the stages, disputes quickly moving into the lose-lose phase. For this reason early intervention in any dispute is always preferable.

Informal discussion and negotiation should always be explored at the outset of any dispute. It can be the case that there are misunderstandings or miscommunications which can be cleared up by frank and open discussions between the parties. Often a trusted adviser, such as a lawyer, accountant or even family friend can be brought in to facilitate the discussions and chair a meeting. Occasionally such discussions can do more harm than good but in most cases they have merely exposed a rift which could not be bridged in any event and have therefore just accelerated the inevitable.

If the conflict has escalated then mediation is a powerful tool to find a resolution and this is discussed in more detail in chapter 8. It should be noted that mediation can be deployed at any time but generally the earlier the better.

If the parties are at war then the binding decision of a third party may be the only outcome that can achieve a resolution. In some circumstances an expert determination may be appropriate (considered in more detail in chapter 8) otherwise it may be necessary to seek the ruling of a Judge or an Arbitrator.

Arbitration is a private dispute resolution process under which the parties present their case and an Arbitrator takes on the role of the Judge. An Arbitrator will make an Award, rather than a Judgment, and this is contractually binding on the parties. An Arbitrator can only be appointed if there is an agreement between the parties to this effect. Sometimes arbitration clauses can be found in shareholder agreements but this is relatively rare. Given this, and the fact that most arbitrations will mirror litigation in terms of the basic process leading up to the hearing of the parties’ respective cases, this book will focus on the litigation (i.e. court) process.

With regard to shareholder dispute litigation the main legal actions that can be taken are:

  • Petition for unfair prejudice under s.994 of the Companies Act 2006 (s.994)

  • Petition for just and equitable winding up under s.122(1)(g) of the Insolvency Act 1996 (s.122(1)(g))

  • A derivative action (one brought by a shareholder but on behalf of the company)

  • An application for rectification

These are considered in more detail in the following chapters.