The Common Causes of Family Business Disputes
Family business disputes follow predictable patterns. Specifically, the legal claims may look different from one case to the next. However, the underlying causes are almost always drawn from the same short list. As a result, understanding the common causes of family business disputes is one of the most useful things any family business owner can do. Importantly, the patterns are the same whether the business is a corner shop or a third-generation manufacturer. Notably, the same patterns appear across sectors, family sizes and parts of the country.
This page sets out the most common causes of family business disputes. Crucially, it covers what each one looks like in practice and why each one tends to surface when it does.
Succession disagreements
By far the most common cause of family business disputes is succession. Specifically, the disagreement is about who takes over the business when the current generation steps aside. Importantly, succession disputes can be about leadership succession, ownership succession or both.
Often, the founder has not made the succession plan explicit. As a result, every family member has formed their own assumption about how it will work. Sometimes, the eldest son assumes he will take over because he always has. Meanwhile, the daughter who has actually been running the operations assumes she will, because she is the one who knows the business. Likewise, the founder’s spouse assumes the business will be shared equally between all the children, because that feels fair. Crucially, none of these expectations have been tested. When the founder finally steps aside or dies, the assumptions collide.
For more on this, see the page on the founder problem in family business disputes and the page on the next generation. For prevention, see the page on succession planning for the family business.
Disputes over remuneration
Another extremely common cause of family business disputes is the way family members are paid. Typically, the dispute arises when one family member is drawing significantly more from the business than another. As a result, the imbalance is read as unfair, even if there is a good reason for it.
For example, the son who runs the business may be paid a managing director’s salary, plus a bonus, plus a company car, plus expenses. By contrast, the daughter who owns the same number of shares but works elsewhere may be receiving only a small dividend. From the business circle, the son’s remuneration is reward for work. From the family circle, the same remuneration looks like one sibling is taking more than the other. Crucially, both views can be valid at once.
Importantly, disputes over remuneration are made worse when the figures are not transparent. Specifically, family members who are not in the business may suspect that the figures are higher than they actually are. Sometimes they are right. As a result, transparency about pay is one of the most effective ways to prevent these disputes from escalating. For the legal framework that can apply, see the page on unfair prejudice petitions in family business disputes.
Disputes over dividends
Closely related to remuneration disputes are disputes over dividends. Specifically, the disagreement is about whether the company should pay dividends, how much, and to whom.
Typically, the dispute arises between family members who work in the business and family members who do not. For example, the working family members may want to retain profits in the company. They may want to fund expansion, build up reserves, or simply leave more in the business for tax reasons. By contrast, the non-working family members may rely on dividends as their main return from the business. As a result, they want a dividend policy that pays out a meaningful share of profits each year.
Importantly, where dividends are kept artificially low while the working family members extract value through high salaries and benefits, the non-working family members may have a legal claim. Specifically, this is one of the classic fact patterns in unfair prejudice cases. For more on this, see the page on the have and have-not pattern in family businesses.
Control and exclusion disputes
Another common cause of family business disputes is control. Specifically, the dispute is about who gets to make decisions. Often, one family member or faction has taken effective control of the business. Meanwhile, other family members feel excluded from decisions that affect them.
For example, board meetings may be held without notice to a minority shareholder. Similarly, accounts may not be circulated. Likewise, information requests may be ignored. Sometimes, the exclusion is deliberate. By contrast, it can also be the unintended result of informal habits that worked while the family was small but no longer work as the family grows.
Crucially, control and exclusion disputes are some of the most legally well-protected in family business law. Specifically, a minority shareholder excluded from management of a quasi-partnership company is one of the classic grounds for an unfair prejudice petition. For more on this, see the page on quasi-partnership in family companies.
Disputes following a death
Importantly, the death of a key family member is one of the most common triggers for a family business dispute. Specifically, the dispute may not arise during the founder’s life. However, once the founder dies, all the unresolved questions about ownership, control and succession surface at once.
For example, the founder’s spouse may inherit a majority of the shares but have no involvement in the business. Meanwhile, one or more children may have been running the business for years on the expectation of eventual control. Likewise, the will may divide the shares equally between children with very different roles in the business. As a result, the family that worked smoothly while the founder was alive can fracture within months of the funeral.
For a fuller treatment, see the dedicated page on family business disputes after a death.
Disputes triggered by divorce or family breakdown
Another common cause of family business disputes is a divorce or relationship breakdown within the family. Specifically, the family member who is divorcing may need to realise the value of their shareholding. Alternatively, the divorcing spouse may claim a beneficial interest in the shares. As a result, what began as a family law matter spills into the family business.
For example, a 50/50 shareholding between a married couple becomes the subject of the divorce. Meanwhile, the business continues to need to operate, employees continue to need to be paid, and decisions continue to need to be taken. Crucially, the cost and disruption of a dispute about the business at the same time as a divorce can be enormous. Notably, the judge in Re Solent Garage Services Ltd [2020] EWHC 1975 (Ch) observed that an unfair prejudice petition between a separating couple about a small garage business should have been resolved within the divorce rather than fought as a company petition.
Importantly, the same dynamics can arise without a divorce, where a couple separates without being married, or where a sibling’s relationship breakdown affects their participation in the family business.
Disputes about strategy and direction
By contrast, some family business disputes are genuinely about commercial strategy rather than personal grievances. Specifically, different family members have different views about where the business should go. For example, one generation may want to invest in growth. Meanwhile, another generation may want to extract dividends and reduce risk. Likewise, one branch of the family may want to expand into new markets. By contrast, another may want to consolidate.
Often, these are legitimate disagreements about commercial direction. Importantly, they would happen in any business. However, in a family business they take on the character of a family argument. Crucially, the right forum for resolving them is a properly functioning board with a clear shareholders’ agreement. For more on this, see the page on shareholders’ agreements for family businesses.
Disputes about the role of non-family executives and in-laws
Another common cause of family business disputes is the role played by non-family executives and in-laws. Specifically, the family may disagree about how much power a non-family managing director should have. Likewise, they may disagree about whether a son-in-law or daughter-in-law should be employed in the business. Sometimes, the dispute is about whether an in-law should have shares.
For example, the founder may want to bring in a senior non-family executive to run the business while the next generation matures. Meanwhile, the next generation may resent the loss of authority. Similarly, one branch of the family may want to give the spouse of a working family member a stake in the business. By contrast, the other branch may see this as diluting family ownership. Crucially, decisions about non-family roles and in-laws need to be agreed openly. Otherwise, they generate resentments that surface as disputes later.
Disputes about the founder’s continuing role
Importantly, one of the most predictable family business disputes is between the founder and the next generation about when the founder should step aside. Specifically, the founder has often built the business from nothing. As a result, the founder finds it almost impossible to let go. Meanwhile, the next generation has been waiting, sometimes for decades, for the founder to retire. Crucially, the conflict between the founder’s identity and the next generation’s career often becomes the central dispute in the family business.
For a deeper treatment of this dynamic, see the page on the founder problem.
Disputes triggered by the passive shareholder
Finally, a common cause of family business disputes is the passive shareholder. Specifically, this is the family member who owns shares but is not involved in the business. Often, they may have inherited their shareholding. Alternatively, they may have walked away from working in the business years ago. Either way, they have a continuing financial interest but no involvement in decisions.
Typically, the disputes that arise are about information, dividends and the value of the shares. For example, the passive shareholder may request management accounts. They may complain about low dividends. They may seek to sell their shares back to the company at a price the working family members consider too high. As a result, what looked like a manageable family arrangement becomes a legal dispute.
For a fuller treatment of this dynamic, see the page on the passive shareholder and the disengaged family member.
How these causes interact
Importantly, these causes rarely appear in isolation. Specifically, most family business disputes involve two or three of them at once. For example, a succession dispute is often layered with a remuneration dispute and a dividend dispute. Likewise, a control dispute is often the surface presentation of a long-standing succession disagreement. Crucially, this is one reason why family business disputes are so much harder to resolve than ordinary commercial disputes. As a result, addressing only one of the surface issues rarely resolves the underlying conflict.
For more on how these layers interact in practice, see the page on what makes family business disputes different.
Why prevention works better than resolution
Importantly, almost every cause of family business disputes on this page is foreseeable. Specifically, the triggers are well known. The patterns repeat. As a result, the cost of preventing a family business dispute is almost always a fraction of the cost of resolving one. For example, a shareholders’ agreement, a documented succession plan and a family forum can address most of the causes set out above before they ever become disputes. Crucially, these tools are most effective when they are put in place while the family is functioning well, not when the dispute has already begun.
For prevention, see the page on preventing family business disputes: the governance checklist.
Frequently asked questions
What is the most common cause of family business disputes?
In short, succession is the most common cause of family business disputes. Specifically, the disagreement is about who leads the business after the current generation, who owns it, and on what terms. Importantly, most succession disputes arise because the succession plan was never made explicit during the founder’s life. As a result, the family is left to work it out under pressure once the founder retires or dies.
Are most family business disputes about money?
Not really. Specifically, money is usually the trigger rather than the cause. For example, a dispute about dividends or remuneration is rarely about the underlying figures alone. Typically, it is about long-standing perceptions of unfairness, exclusion or favouritism. As a result, resolving the money issue without addressing the underlying perception rarely settles the dispute.
Can a family business dispute be caused by an in-law?
Yes. Specifically, family business disputes are often triggered by an in-law who joins the family or becomes more involved. Typically, the in-law brings a different perspective on fairness and may have less stake in keeping the family together. Importantly, the in-law is rarely the underlying cause. However, they can be the catalyst that brings long-standing issues to the surface.
Why do family business disputes often surface after a death?
In short, the death of a founder removes the person who was holding the family arrangements together. Specifically, while the founder is alive, many issues are left informal because the founder is trusted to make the right decisions. After the death, those informal arrangements have to be replaced with formal ones. As a result, every unresolved question surfaces at once, often without the person best placed to answer them. For more on this, see family business disputes after a death.
Can a family business dispute be prevented?
In most cases, yes. Specifically, the causes of family business disputes are well known and the triggers are predictable. As a result, governance tools like shareholders’ agreements, family councils and clear succession plans can prevent most disputes from arising. Importantly, these tools are most effective when put in place while the family is functioning well. For practical guidance, see preventing family business disputes.
Further reading on this site
- Family Business Disputes (main page)
- What Makes Family Business Disputes Different
- The Three Circles Model
- Early Warning Signs of a Family Business Dispute
- The Founder Problem
- The Next Generation
- The Passive Shareholder
- The Have and Have-Not Pattern
- Family Business Disputes After a Death
- Preventing Family Business Disputes
- Why Mediation Is Usually the Right Starting Point
- Unfair Prejudice Claims and Derivative Actions
Get advice on your situation
If you are involved in a family business dispute, or you can see one developing, 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. In addition, my book Winning in Family Business Disputes (forthcoming) covers the common causes of family business disputes in detail, alongside my published works on shareholder disputes and commercial mediation. 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.