Resolving family disputes

Family Business Disputes

Family business disputes are unlike any other commercial disputes. Specifically, they combine the legal and financial pressures of business with the long history of family relationships. As a result, the same dispute is a shareholder matter, a board matter, a succession matter and a family matter all at once. Importantly, the family relationships continue long after the legal claim has been resolved. Crucially, this is what makes family business disputes so unusually difficult, and why they need specialist advice from someone who understands both the law and the family dynamics.

This hub provides a comprehensive guide to family business disputes in England and Wales. Specifically, it covers the causes, the warning signs, the legal framework, the mediation route, the cost of litigation, the leading cases, and the steps families can take to prevent disputes from arising in the first place. As a result, the pages below address the questions family business owners actually ask, in plain English, with the relevant case law and practical guidance.

About Robin Somerville

I am a barrister, mediator, mediation advocate and investigator specialising in family business disputes, shareholder disputes and partnership disputes. Specifically, I act for family business owners, the next generation, passive shareholders, executors and trustees on disputes throughout England and Wales. Importantly, I can be instructed directly under the public access rules, which means you do not need a solicitor to take advice from me at the early stages of a dispute. As a result, families considering whether they have a dispute, or how to handle one that has started to develop, can take specialist advice from me at much lower cost than they might expect.

In addition to my dispute work, I act as a commercial mediator in family business and shareholder disputes, as a mediation advocate for parties at mediation, and as an investigator for families and boards looking to establish the facts of a particular situation before deciding what to do. My book Winning in Commercial Mediation is published and available, and my forthcoming book Winning in Family Business Disputes covers the field in depth. I have also written Shareholder Disputes, the leading practical guide for shareholders in unfair prejudice and related cases.

Why family business disputes are different

Specifically, family business disputes differ from ordinary commercial disputes in four important ways. First, the parties have a continuing relationship that survives the dispute. Importantly, siblings remain siblings, parents remain parents, and weddings, funerals and birthdays continue to bring the parties together regardless of the legal claim. Second, the issues are wider than the legal claim. Specifically, the legal claim is usually the surface presentation of years of accumulated grievance. Third, the legal framework draws on more areas of law than most commercial disputes. Specifically, family business disputes can involve company law, partnership law, trust law, contract law, employment law and family law all at once. Fourth, the cost of a dispute, both financial and personal, is unusually high. As a result, the strategic choices that family business owners face are unusually consequential. For a fuller treatment, see what makes family business disputes different.

Understanding the dynamics

Importantly, the first step in handling any family business dispute is understanding the dynamics that produce it. Specifically, the classic analytical tool is the three circles model, which separates family, ownership and business into three overlapping groups. As a result, different people sit in different combinations of the circles, and the tensions between the circles produce the most predictable disputes. By contrast, families that understand the three circles model usually navigate their disputes more constructively than families that do not. For more, see the three circles model.

Crucially, the causes of family business disputes follow recognisable patterns. Specifically, the most common are succession, remuneration, dividends, control, the death of a key family member, divorce, and strategy. Importantly, these causes rarely appear in isolation. As a result, most family business disputes involve two or three of them at once. For the full picture, see the common causes of family business disputes.

By contrast, most family business disputes do not come out of nowhere. Specifically, the warning signs are usually visible months or years before the dispute breaks. As a result, families that recognise the early warning signs have a much better chance of preventing the dispute. For more, see early warning signs of a family business dispute.

The people in a family business dispute

Importantly, family business disputes typically involve recognisable types of family member. Specifically, the four most common are the founder, the next generation, the passive shareholder, and the working family member.

First, the founder. Specifically, the founder problem is one of the most predictable causes of family business disputes. Importantly, the founder has built the business from nothing and finds it almost impossible to let go. As a result, the gap between when the founder should retire and when the founder will retire is the source of an enormous proportion of family business disputes. For more, see the founder problem.

Second, the next generation. By contrast, the next generation has its own pressures, expectations and grievances. Specifically, the next generation has often given up other career options to join the family business and may feel that the succession they were promised is being indefinitely postponed. For more, see the next generation.

Third, the passive shareholder. Importantly, the passive shareholder owns shares in the business but does not work in it. As a result, they depend on dividends, transparency and the integrity of the working family members. Crucially, they are structurally vulnerable and the way the family handles them often determines whether a dispute develops. For more, see the passive shareholder and the disengaged family member.

Finally, the dynamic between working and non-working family members produces the most common dispute pattern of all. Specifically, this is the have and have-not pattern: working family members extract significant value through salaries and benefits while non-working family members receive minimal dividends. Crucially, this is the textbook fact pattern for unfair prejudice petitions. For more, see the have and have-not pattern.

The legal framework

Specifically, the legal framework for family business disputes is broader than many family business owners realise. Importantly, the framework draws on company law, partnership law, trust law, contract law, employment law and family law. As a result, the legal questions are rarely confined to a single area, and the same set of facts can give rise to claims under several different headings. For the wider picture, see the legal framework for family business disputes.

Crucially, the most commonly invoked provision is section 994 of the Companies Act 2006, which deals with unfair prejudice. Specifically, almost every reported family business dispute case in the last forty years has involved an unfair prejudice claim. Importantly, the petition can be brought by any shareholder, and the most common remedy is a court-ordered buyout of the petitioner’s shares at a fair price. For more, see unfair prejudice petitions in family business disputes.

By contrast, the legal character of the family company itself is often the decisive issue. Specifically, the great majority of family businesses are quasi-partnerships in legal terms, which produces additional protections for minority shareholders. Crucially, whether a particular company is a quasi-partnership often determines the outcome of the dispute. For more, see quasi-partnership in family companies.

Importantly, the legal framework operates against the background of any shareholders’ agreement the family has put in place. Specifically, a current and well-drafted shareholders’ agreement is the single most effective tool for preventing family business disputes. By contrast, the absence of an agreement or the presence of an out-of-date one is one of the most common causes of dispute. For more, see shareholders’ agreements for family businesses.

Crucially, valuation is the issue that occupies most of the time and cost in many family business disputes. Specifically, the court has wide discretion as to how to value the shares, and the valuation can vary by hundreds of thousands of pounds depending on the choices the court makes. Importantly, whether a minority discount applies depends on the quasi-partnership question and on the conduct of the parties. For more, see family business valuation in a dispute.

Mediation and resolution

Importantly, mediation is almost always the right starting point for a family business dispute. Specifically, mediation is faster, cheaper, more confidential and more flexible than litigation. As a result, the great majority of family business disputes that reach a satisfactory conclusion do so through mediation rather than judgment. Crucially, the Court of Appeal in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 confirmed that the court can require parties to engage in mediation, which means mediation is now effectively unavoidable in family business disputes. For more, see why mediation is usually the right starting point.

By contrast, family business owners often arrive at mediation without a clear picture of what is going to happen. Specifically, the day itself has a structure that can be understood and prepared for. As a result, family business owners who prepare well typically achieve significantly better outcomes than those who do not. For a practical walk-through, see what to expect at a family business mediation.

Crucially, the settlement agreement that resolves a family business dispute is one of the most important documents the family will ever sign. Specifically, it has to address the legal issues, the financial issues, the governance issues and the family relationships all at once. As a result, the quality of the settlement determines whether the family moves forward or finds itself back in dispute within a few years. For more, see settling a family business dispute.

The cost of getting it wrong

Specifically, family business litigation is unusually expensive. Importantly, a contested unfair prejudice petition typically costs each side between £150,000 and £750,000 in legal fees, with the total across both sides often exceeding £1 million. As a result, the cost of a single dispute often exceeds the value of the shareholding being argued over. Crucially, the indirect costs, including the impact on the business, the family relationships and the personal wellbeing of the parties, often exceed the legal fees by a substantial margin. For an honest account of the cost picture, see the cost of family business litigation.

Prevention is far cheaper than resolution

Importantly, the cost of preventing a family business dispute is a tiny fraction of the cost of resolving one. Specifically, most family business disputes are preventable through good governance. As a result, families that invest in proper governance early enjoy a substantial reduction in the risk of serious disputes later. For a practical checklist, see preventing family business disputes.

Crucially, succession planning is the single most important thing a family business can do to prevent disputes. Specifically, succession is the most common cause of family business disputes by a wide margin. As a result, families that plan succession well typically avoid the most serious form of family business conflict. For more, see succession planning for the family business.

By contrast, the appointment of an independent non-executive director is often the single most effective intervention a family business can make to professionalise its governance. Specifically, the right non-executive director brings outside perspective, professional discipline and independent judgment to a board that would otherwise be made up entirely of family members. For more, see the role of the non-executive director.

Importantly, a family constitution is one of the most effective tools families can use to articulate values, set expectations and provide a framework for difficult conversations. Specifically, the constitution sits alongside the legal documents and gives the family a structured space for the conversations that would otherwise be avoided. For more, see family constitutions and family forums.

The death of a key family member

Crucially, the death of a founder or major shareholder is one of the most predictable triggers for a family business dispute. Specifically, the death removes the person who was holding the family arrangements together, and every unresolved question surfaces at once. Importantly, the family is grieving at the same time as having to make major decisions. As a result, families that anticipate the risk and plan accordingly typically avoid the worst outcomes. For more, see family business disputes after a death.

The case law and the practical tips

Importantly, the modern legal framework for family business disputes has been built up through a series of landmark decisions over more than fifty years. Specifically, the cases on unfair prejudice, quasi-partnership, share valuation, mediation and proprietary estoppel are the foundation on which any modern family business dispute is argued. As a result, family business owners benefit from knowing the names of the leading cases and what they decided at a high level. For a guide to the twenty-five most important cases, see the most important family business cases.

By contrast, the practical disciplines that distinguish well-run family businesses from those that end in dispute are not legal rules. Specifically, they are habits that have been observed in successful family businesses across many sectors and many countries. For a practical guide, see 30 tips for family business owners and directors.

The full hub

The pages below cover the field in depth. Specifically, each page addresses one aspect of family business disputes, with the legal framework, the practical reality and the strategic considerations explained in plain English.

Understanding the dynamics

• What Makes Family Business Disputes Different
• The Three Circles Model
• The Common Causes of Family Business Disputes
• Early Warning Signs of a Family Business Dispute

The people involved

• The Founder Problem
• The Next Generation
• The Passive Shareholder and the Disengaged Family Member
• The Have and Have-Not Pattern

The legal framework

• The Legal Framework for Family Business Disputes
• Unfair Prejudice Petitions
• Quasi-Partnership in Family Companies
• Shareholders’ Agreements for Family Businesses
• Family Business Valuation in a Dispute

Mediation and resolution

• Why Mediation Is Usually the Right Starting Point
• What to Expect at a Family Business Mediation
• Settling a Family Business Dispute
• The Cost of Family Business Litigation

Prevention and governance

• Preventing Family Business Disputes: The Governance Checklist
• Succession Planning for the Family Business
• The Role of the Non-Executive Director
• Family Constitutions and Family Forums

Specific situations and reference

• Family Business Disputes After a Death
• The Most Important Family Business Cases
• 30 Tips for Family Business Owners and Directors

Related areas of my practice

Family business disputes overlap with several related areas of my practice. Specifically, see also my pages on unfair prejudice claims and derivative actions and resolving business partnership disputes. For my wider work on commercial mediation, see commercial mediator, mediation advocacy and the mediation knowledge hub. For the direct access route, see direct access barrister: legal advice, advocacy and representation.

Books

My published works on this and related fields are listed on my books page. Specifically, Winning in Commercial Mediation covers the mediation process in detail. Shareholder Disputes covers the law and practice of unfair prejudice petitions and related claims. My forthcoming book Winning in Family Business Disputes covers the family business field in depth. Importantly, family business owners often find that the books give them a fuller picture than any single web page can.

Frequently asked questions

What is a family business dispute?

In short, a family business dispute is a dispute between family members about the running, ownership or governance of a business they own together. Specifically, the most common forms are unfair prejudice petitions, succession disputes, disputes about remuneration and dividends, and disputes about the conduct of the family members who run the business. Importantly, the legal claim is usually only the surface presentation of a wider set of issues that involve the family relationships as well as the business.

What is the most common type of family business dispute?

Typically, the most common type is an unfair prejudice petition under section 994 of the Companies Act 2006. Specifically, this is usually brought by a non-working family member against the working family members who control the company. Importantly, the most common factual pattern is the have and have-not pattern, where the working family members extract significant value through salaries and benefits while non-working family members receive minimal dividends.

How much does it cost to resolve a family business dispute?

It depends on the route. Specifically, mediation typically costs between £5,000 and £25,000 per party in total. By contrast, a contested unfair prejudice petition typically costs each side between £150,000 and £750,000 in legal fees. As a result, the cost saving from a successful mediation is enormous. Crucially, the indirect costs of litigation, including the impact on the business, the family relationships and the personal wellbeing of the parties, often exceed the legal fees by a substantial margin.

Do I need a solicitor to take advice on a family business dispute?

Not necessarily. Specifically, barristers can be instructed directly under the public access rules. As a result, family business owners can take advice from a specialist barrister without instructing a solicitor first. Importantly, this can produce a sharper strategic picture much earlier in the process than would otherwise be available, often at lower cost. For more on this route, see direct access barrister.

Where do I start if I think I have a family business dispute?

Generally, the most useful first step is to take early specialist advice. Specifically, the advice should cover the legal framework, the realistic options, and the strategic considerations. Importantly, early advice does not commit you to litigation. By contrast, it provides the clear picture needed for sensible decision-making. As a result, family business owners who take early advice usually achieve significantly better outcomes than those who delay.

Get in touch

If you are involved in a family business dispute, or you can see one developing, or you want to put governance in place to prevent one, early specialist advice is one of the most valuable investments you can make. Specifically, I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.