Legal aspects of a family owned business

Many owner run SME’s are family owned and managed businesses. Whilst in the first generation this can often work well, as the ownership of the company is passed through to the next generation problems often occur. The lines between family and business can become blurred and relationships strained. Many family businesses grow organically over the

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Many owner run SME’s are family owned and managed businesses. Whilst in the first generation this can often work well, as the ownership of the company is passed through to the next generation problems often occur. The lines between family and business can become blurred and relationships strained.

Many family businesses grow organically over the years and whilst they expand they do not necessarily put the procedures and infrastructures in place to deal with the expansion which creates a problem later on down the line.

Legal issues with family owned and run businesses

One of the biggest issues with family owned companies is where the shares have passed from the older generation who started the business to the younger generation who have their own views on how they want to work. They may wish to change the business model and structure and implement modern practices. Further if the shares are passed to different branches of the family who may not have the same views on how to run the company.

Avoiding disputes with family businesses

In order to try and prevent any disputes from arising it is sensible to have certain measures in place.

In particular it is sensible to have a comprehensive shareholders agreement and / or a family charter. These set out how the business is to be run on a day to day basis but also will deal with issues such as how the shares are to be held. A shareholders agreement will differ for a family company from one which is owned by non related parties. For example its important to consider whether the shares in the company are always only going to be owned by family members or would a scenario be acceptable where a family member were to sell their shares to a third party or a third party were to invest in the company.

Additional considerations are whether each family member is entitled to be a director and sit on the board?  Will all of their shares have equal voting rights or will certain shares only attract a dividend and others have voting rights attached.

It should also be legislated for if some shareholders wish to sell the company, what the position is regarding this and or if a deadlock arises.

It may be sensible to have in place that a business plan needs to be produced on an annual basis so that all shareholders can see the intended growth and direction of the company and have an opportunity to approve this even if they are not involved in the day to day running of the company.

It is almost impossible to run a company if each of the individual shareholders has a different view as to how it will be run and what direction it should take. If a dispute does arise the most time and cost effective way to deal with it is by way of mediation. This also often helps to preserve the family relationship which can be destroyed if one party were to proceed to court to assert its position. The shareholders agreement will often contain a provision that the parties must first attempt mediation before bringing legal proceedings.

dserota-sbI can advise on all issues which relate to owning and running a family business. Investing in advice will often avoid far more expensive and damaging disputes at a later stage and make for better family relationships where everyone knows where they stand. Please get in touch with me for a free discussion or initial meeting.

commercial law • Debbie Serota • Disputes

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