Managing disputes in owner-managed and family businesses following a death or loss of capacity

Family and owner-managed business can be vulnerable to disputes as a result of the personal relationships involved. These disputes are often prompted by succession issues, particularly when a director or key shareholder loses capacity or dies unexpectedly.

Questions frequently arise which can throw the operation of the business into turmoil and consume the time and resources of those remaining in it. When a director dies, their appointment automatically terminates. Is there an agreement as to who should replace them, and do the remaining directors or shareholders have the power to appoint a new director? When a shareholder dies, their shares pass under the terms of their will or the intestacy rules. Are the remaining directors and shareholders happy with the identity of the new shareholder, or do they risk disrupting the smooth running of the business?

The following considerations can help to avoid and resolve disputes arising from these questions:

1. Plan ahead: Consider carefully what will happen when a director or shareholder dies or loses capacity, and whether the Articles of Association and/or Shareholders Agreement adequately deal with the situation. Consider who the shares are going to pass to and what rights you want those new shareholders to have. Do you want them to receive dividends and have voting rights? If not, consider rights of pre-emption and different classes of shares. Do you need an insurance policy to enable the purchase of the shares? Don’t leave it too late – resolving a loss of capacity or death is much more time consuming and costly, and much more likely to cause disagreement if it only takes place once the event happens.
2. Comprehensive and clear: Ensure your governing documents are comprehensive and align with each other. Unclear and conflicting documents are a cause for dispute. Have a clear ownership framework with agreed succession planning. If you're a sole director/shareholder, work through the situation with your advisors and consider what else needs to be implemented. 
3. Communicate: Communicate with the key stakeholders in the business what will happen in each eventuality. Consider a family charter which sets out what will happen on the death of a shareholder or director. Many disputes can be avoided by scenarios being discussed and agreed upon before they arise. This is important both in terms of the running of the company and family harmony. If you can, involve other family members in your discussions with your advisers.
4. Revisit: Keep your decisions and the documents under continuous review. Decisions and documents made years ago may no longer reflect the parties’ intentions and expectations, and may not reflect up-to-date tax planning and other regulatory issues.
5. Plan for the worst: Some level of disagreement is inevitable in any family and owner-managed business. Agree what will happen if a dispute arises and how it will be resolved, eg by mediation or external expert guidance. This will help the parties refocus on the success of the business as quickly as possible.

If you would like any advice about avoiding or resolving the disputes which can arise on the death of a director or shareholder, contact our estate, trust and will disputes team.