Families in Business: Managing conflict between family members

The business has lost its leader with no anointed successor. Consequently, Daniel's death leaves a power vacuum. Frank and Grace are clearly not aligned with respect to their future aspirations for the ABC Group and so are likely to become embroiled in a struggle for influence and control, whilst the board may find themselves split with different allegiances. 

ABC Group, having thrived for so long under autocratic control, now desperately requires formal and robust corporate governance. The board needs to gauge the views of the third-party investors and throw their support behind a newly elected leader. There needs to be urgent clarity on roles, voting rights, powers, division of responsibilities, and the formulation of a roadmap for the future of the ABC Group. These sensitive and often highly emotive discussions blur the lines between business and family, necessitating the help of corporate mediators with significant experience in traversing these difficulties.

When Daniel died, the ownership of his shares in the ABC Group became fragmented as a result of devolving to several family members under the terms of his Will. Ideally, Daniel would have considered with his advisors during his lifetime how to ensure the ownership of his ABC Group shares remains consolidated after his death, e.g., by using a trust. However, in the absence of any such planning, it is critical that all new shareholders are brought to the negotiating table and, if possible, enter into corporate governance arrangements to agree how they will deal with their shares. This should necessarily include restrictions on sale and tag/drag-along rights.

Failure to do so gives rise to enormous risks of disruption for the business if individual shareholders are free to dispose of their shares to any third-party investor, who may potentially acquire rights to board representation or a say over management positions. The family's control or influence over the group risks being diluted or even eradicated, the group sold on, broken up or pillaged for assets.

The above dovetails neatly with the need to consider the views and needs of all family members and how they will be met following Daniel's death. Harry and Imogen may be wholly unsuited to involvement as directors in the business, but their principal concerns are likely to be liquidity driven.

To assuage Harry and Imogen's concerns whilst precluding their involvement in the business, it may be advisable for the ABC Group to effect a corporate restructuring, bifurcating its share capital between those shares that confer voting rights and board representation, and those that only carry rights to dividends. In addition, certain protections for these non-voting shareholders could be built in so as to ensure a specified dividend level is delivered over a specified period.

ABC Limited was in its infancy when Daniel and Elizabeth married. They assumed traditional roles with Elizabeth organising home life, enabling Daniel to focus on the business which he did to the detriment of family life. On the advice of his accountant, at the point at which the business started to take off, Daniel transferred some of his shares to Elizabeth so that she could receive an income at dividend tax rates.

When it came to their divorce, Elizabeth's position had to be considered both as a wife in the context of a long marriage and as a shareholder.

As a wife, Elizabeth sought to assert her right to half of the value of the assets that had been built up during the marriage, (including the value of their combined shareholding in ABC Limited).

As a shareholder, and in the absence of any specific provision in the articles of association or a shareholders' agreement pre-empting what would happen to Elizabeth's shares in the event of a divorce, the issue of her shareholding also fell to be addressed.

Frank sided with his father and Grace with her mother. Years of litigation ensued. To the consternation of the minority shareholders, strategic investments had to be put on hold to enable Daniel to extract liquidity towards satisfying Elizabeth's claims.

Daniel had made his proposal of marriage to Imogen conditional upon her agreeing to enter into a pre-marital agreement.

Imogen also had concerns: Given the age gap between them, Daniel might die leaving her widowed with minor children towards whom his adult children might be hostile.

These concerns on both sides were addressed within a pre-marital agreement which included provision for Daniel to set up a trust for the benefit of Imogen and any children of their marriage. This gave Daniel the comfort of knowing that there was a ceiling on any claims that Imogen could make against him in the event of a divorce and Imogen the security of knowing that her needs would be met without protracted litigation. 

The collaborative-style approach adopted by the lawyers negotiating the terms of the pre-marital agreement helped to minimise the tensions that can sometimes accompany the delicate subject of asking a spouse to enter into such an agreement.