The perils of family businesses
The perils of family businesses
Many couples set up in business together not expecting to split up; how can they navigate this tricky time without destroying a business they’ve grafted to build? A recent HMRC case details the challenges below:
Successful construction business
Amanda Davies (D) and Patrick O’Keeffe (O) were in a relationship for 20 years and had two children together. They also ran a construction business, consisting of eight companies altogether. They were joint directors and equal shareholders of the two companies at the centre of the unfair prejudice proceedings, Greenfrost Ltd and PMO Property Ltd. The companies operated as quasi-partnerships. There were no formal meetings or decision-making processes, and the assets and liabilities of one company were routinely treated as belonging to others.
Tip. Company law applies to family companies as much as to any other type of company. It may seem pointless to record decisions and keep assets/liabilities separate, but muddying the waters causes confusion and leaves directors open to claims for breach of duty and other legal obligations.
Breakdown
Amidst business and personal financial pressure, the couple split. D alleged that O excluded her from management and misappropriated the business’ assets. Her share of Greenfrost Ltd (G Ltd) was sold, she was replaced as a director, and O secured personal borrowing against PMO Property Ltd’s (PMO’s) assets - all without consulting or informing D.
Tip. It may be awkward, but it’s important for family businesses to agree a framework for dealing with difficult issues such as succession planning, financial problems, disputes and breakups. “What if” plans made when everyone is getting on at least provide a starting point for navigating these tricky issues if they arise.
Unfair prejudice
To obtain relief from unfair prejudice, the claimant must show that their interests as a shareholder have suffered because of how the company has been run. This can be difficult to establish in cases where the various interests of the parties - as individuals, shareholders, directors and creditors - are intertwined.
Did his bit? O countered that he had consulted D when necessary, but the court found that his evidence was unreliable. For example, PMO board meeting minutes recorded D as present at a meeting approving the grant of security, but O admitted in court that D was only “present” in the sense that she was in the same building, not at the meeting. Since O had frozen D out of the business and taken decisions in his own interests, in many cases without D’s consent or knowledge, the court was satisfied that her interests as a shareholder had suffered. O was ordered to buy out D’s share in G Ltd and PMO, at £787,780 and £66,112 respectively, click here for the case.
A better way
Family companies can help to avoid this kind of outcome by:
agreeing in advance how to tackle disputes
complying with company law, including treating the company as a separate entity and acting in its interests
if personal differences hamper decision making, consider appointing an independent third party to the board; and
if a dispute escalates, consult a dispute-resolution professional who specialises in small business disputes, click here for more information on mediation. Mediation is cheaper, quicker and more flexible than going to court.
A couple stopped communicating when they split up, including about business matters, enabling one of them to deal with their joint business in his own interests. The court ordered them to pay the other director more than £800,000. Directors can help to limit the effects of a breakdown in personal relationships by having a “what if” plan in place and seeking external help with disputes at an early stage.