Settling a Family Business Dispute: What a Good Settlement Looks Like

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, a well-drafted settlement agreement does work that no judgment could ever do. Importantly, the great majority of family business disputes settle rather than going to judgment. Crucially, the quality of the settlement determines whether the family moves forward or finds itself back in dispute within a few years. As a result, family business owners contemplating settlement need to understand what a good settlement actually contains.

This page explains what a settlement agreement in a family business dispute should look like. Specifically, it covers the financial elements, the governance elements, the relationship elements, the legal mechanics, and the practical steps for making the settlement work.

Why settlement matters more in family business disputes

In short, settlement matters more in family business disputes than in ordinary commercial cases. Specifically, there are three reasons.

First, the parties usually have a continuing relationship that needs to survive the dispute. Importantly, the settlement is not just an end-point. By contrast, it is the foundation for how the family will function going forward. As a result, a settlement that resolves the legal issue but destroys the family relationship is a partial failure. Second, the issues in a family business dispute are wider than the legal claim. Specifically, the settlement needs to address the underlying causes of the dispute, not just the symptom that produced the legal claim. Third, the cost of a failed settlement is enormous. Importantly, where the settlement does not hold and the dispute resumes, the costs incurred up to that point are largely wasted. As a result, families settling a dispute need to invest properly in getting the settlement right.

For the wider context, see what makes family business disputes different.

The financial elements of a settlement

Crucially, almost every settlement of a family business dispute involves some financial element. Specifically, the most common financial provisions are these.

Share buyout

First, and most commonly, the settlement involves one party buying out the other. Specifically, the working family members typically buy out the non-working family members, although the reverse can also happen. Importantly, the buyout price needs to be agreed, the structure of the payment needs to be set, and the warranties and indemnities need to be addressed. As a result, the buyout itself can be a substantial transaction requiring its own share purchase agreement.

By contrast, the buyout price is rarely a single number. Specifically, it may include an initial payment, deferred payments, and adjustments based on future events. Importantly, the structure has tax implications that need to be considered carefully. For more on the valuation question, see family business valuation in a dispute.

Payment structure and security

Second, the structure of the payment matters as much as the headline figure. Specifically, lump-sum payments require the buyer to fund the entire amount upfront. By contrast, deferred payments spread the cost over time. Importantly, deferred payments need to be secured. As a result, the selling party usually requires personal guarantees, charges over assets, or other security to ensure the payments are made.

In practice, the most common payment structures include the following. First, a lump sum at completion. Second, payments in installments over two to five years. Third, an earn-out based on future performance of the business. Fourth, a combination of these elements. Crucially, the structure should reflect the parties’ tax position, the buyer’s ability to fund the payments, and the seller’s need for certainty. Importantly, the structure should not depend on goodwill between the parties because that goodwill may not survive the dispute.

Costs

Third, the settlement should address the legal costs that have been incurred up to the point of settlement. Specifically, who pays the costs? Are they shared equally? Are they paid out of the buyout price? Importantly, costs in family business disputes are often a six-figure sum on each side. As a result, the question of who pays them is a substantial element of the overall financial deal.

Tax structuring

Fourth, the settlement should be structured to minimise the tax impact for both sides. Specifically, capital gains tax, business property relief and other reliefs can be optimised through careful structuring. Importantly, the tax advice needs to be taken from a specialist alongside the legal advice. As a result, the parties to a family business settlement should usually have tax counsel as well as legal counsel.

The governance elements of a settlement

Crucially, where the family is going to continue to operate the business together after the settlement, the governance arrangements need to be addressed. Specifically, the most common governance provisions are these.

Updated shareholders’ agreement

First, the parties should put in place a new or updated shareholders’ agreement. Importantly, this addresses the issues that the absence of an agreement allowed to develop into a dispute. As a result, the settlement should not just end the current dispute but should reduce the risk of future disputes. For more on this, see shareholders’ agreements for family businesses.

Board composition and decision-making

Second, the settlement should address the composition of the board and how decisions will be taken going forward. Specifically, this often includes the appointment of an independent non-executive chair, the introduction of reserved matters requiring shareholder consent, and the regularisation of board procedures. Importantly, the introduction of independent governance is often one of the most valuable parts of the settlement. By contrast, returning to the informal arrangements that produced the dispute is rarely a good idea. For more on this, see the role of the non-executive director.

Information and transparency

Third, the settlement should provide for regular financial reporting to shareholders. Specifically, this typically includes quarterly management accounts, annual budget approvals, and disclosure of director remuneration. Importantly, the absence of transparency is one of the most common causes of family business disputes. As a result, building transparency into the settlement is one of the most effective preventive measures.

Remuneration and dividend policy

Fourth, the settlement should include a remuneration policy for working family members and a dividend policy for shareholders generally. Specifically, the remuneration policy should commit the family to market-rate benchmarking. The dividend policy should set out the proportion of profits to be distributed and the timetable. Crucially, these policies address the have and have-not pattern directly. For more on this, see the have and have-not pattern.

Family forum

Fifth, the settlement should consider establishing a family forum. Specifically, this provides a regular space for the family to discuss the business and their relationship with it. Importantly, the family forum is separate from the board and addresses family matters rather than business matters. As a result, future tensions are surfaced in the forum rather than allowed to develop into disputes. For more on this, see family constitutions and family forums.

The relationship elements of a settlement

By contrast, the relationship elements of a settlement are often the most valuable. Specifically, these are the elements that a court could never have ordered but that mediation can produce. Importantly, the most common relationship elements are these.

• First, an apology or acknowledgement. Specifically, an apology at the right moment can transform a settlement from a transactional exit into a genuine resolution.
• Second, an agreement about communication going forward. For example, how the parties will speak about each other in public, how they will handle questions from non-family members, and how they will communicate about the business.
• Third, an agreement about family events. Specifically, how weddings, funerals, birthdays and other family occasions will be handled. Importantly, these are often the issues that matter most to the parties personally.
• Fourth, an agreement about what happened. Specifically, a shared version of events that both sides can live with. Crucially, this is not the same as agreeing who was right. By contrast, it is an agreement about how the story of the dispute will be told.
• Finally, an undertaking about future conduct. For example, an agreement not to make disparaging comments, not to involve the wider family in the dispute, and not to seek to undermine the settlement.

Importantly, these elements are sometimes dismissed as “soft”. By contrast, they are often the elements that determine whether the settlement actually holds. As a result, family business settlements should include them where the parties can agree to them.

The legal mechanics of a settlement agreement

Crucially, the settlement agreement needs to work as a legal document as well as a family one. Specifically, the legal mechanics include the following.

Full and final settlement

First, the agreement should state that it is in full and final settlement of all claims between the parties. Importantly, this prevents either side from raising the same issues again later. As a result, the parties can move forward with confidence that the dispute is over.

Release of claims

Second, the agreement should include a mutual release of all claims arising out of the matters in dispute. Specifically, the release should be drafted carefully to cover known and unknown claims relating to the dispute, but should not extend to unrelated matters. Importantly, the scope of the release is one of the most important provisions in the agreement.

Confidentiality

Third, the agreement should include confidentiality provisions. Specifically, the parties should be required to keep the terms of the settlement confidential. As a result, the financial figures, the personal commitments and the underlying issues are protected from disclosure.

Non-disparagement

Fourth, the agreement should include non-disparagement clauses. Specifically, the parties should agree not to make negative public statements about each other. Importantly, this is particularly important in family business settlements because of the continuing family relationship.

Dispute resolution

Fifth, the agreement should include a dispute resolution clause for any disputes arising out of the settlement itself. Specifically, the parties should commit to mediation before issuing any proceedings to enforce the settlement. As a result, the settlement provides for its own enforcement mechanism that avoids returning to court.

Governing law and jurisdiction

Sixth, the agreement should specify the governing law and the jurisdiction. Specifically, in family business disputes in England and Wales this is usually English law and the exclusive jurisdiction of the English courts.

Counterparts and execution

Finally, the agreement should provide for execution in counterparts and should be signed by all parties on the day of the mediation where possible. Importantly, the worst time to finalise a settlement is in the days after the mediation, when reflection and second thoughts can undermine the deal.

The Tomlin order route

Importantly, where proceedings have already been issued, the settlement is often recorded in the form of a Tomlin order. Specifically, this is a court order that stays the proceedings on the terms of a schedule attached to the order. As a result, the proceedings are paused without being dismissed, and the schedule sets out the agreed settlement.

Crucially, the Tomlin order has two advantages. First, it makes the settlement enforceable as a court order, which provides additional security. Second, it allows the schedule to remain confidential, where the order itself becomes a matter of public record. As a result, the financial terms of the settlement do not need to be disclosed publicly. By contrast, where there are no proceedings on foot, the settlement is recorded in a stand-alone settlement agreement. Importantly, the choice between the two depends on the procedural position. For more on the wider litigation context, see the cost of family business litigation.

What can go wrong with a settlement

By contrast, settlements can and do fail. Specifically, the most common failure modes are these.

• First, the settlement is too thin. Specifically, the parties have agreed the headline financial terms but have not addressed the governance, relationship or future-conduct issues. As a result, the underlying causes of the dispute remain unresolved. Crucially, this is the single most common reason family business settlements fail.
• Second, the payment structure is unrealistic. For example, the buyer cannot fund the agreed payments on the agreed timetable. As a result, the settlement breaks down once the first payment is missed.
• Third, the warranties and indemnities are inadequate. Specifically, the buyer discovers issues with the business after completion that should have been disclosed. As a result, the parties are back in dispute about the disclosure.
• Fourth, the settlement is not properly documented. For example, the parties go home with only a heads of terms that turns out to contain ambiguities. As a result, the deal falls apart in the drafting.
• Fifth, the governance changes are not implemented. Specifically, the new shareholders’ agreement is never signed, the family forum is never established, and the transparency provisions are never honoured. As a result, the family ends up in dispute again within a few years.
• Finally, the relationship elements are missing. Specifically, the apology that was needed is not given, the acknowledgement that mattered is not made, and the family resentments continue. As a result, the next dispute arises and the cycle begins again.

Importantly, all of these failure modes are preventable. As a result, family business owners settling a dispute should make sure that the settlement is comprehensive, well-drafted, properly funded and genuinely implemented.

The settlement and the wider family

Crucially, the settlement of a family business dispute affects more than just the parties to the dispute. Specifically, the wider family is usually watching. As a result, the settlement needs to be communicated to the wider family in a way that does not reopen the dispute.

In practice, the most useful approach is for the parties to agree a single statement that they will share with the wider family. Specifically, the statement should explain what has been agreed, what each party is committing to, and how the family will move forward. Importantly, the statement should not apportion blame. As a result, family members who were not directly involved are not asked to take sides.

By contrast, where the parties cannot agree a single statement, the wider family typically hears two different versions of what happened. Crucially, this often reopens the dispute. As a result, agreeing the communication to the wider family is a small but important part of the settlement process.

Implementing the settlement

Importantly, signing the settlement agreement is the beginning of the implementation, not the end. Specifically, the parties need to do several things after signing.

First, the financial transactions need to take place. Specifically, the share transfers need to be effected, the payments need to be made, and the security needs to be put in place. Second, the legal documents need to be updated. For example, the articles of association, the shareholders’ agreement, the directors’ loan accounts and the Companies House filings. Third, the governance changes need to be implemented. Specifically, the new directors need to be appointed, the family forum needs to be established, and the new reporting arrangements need to be put in place. Fourth, the relationship commitments need to be honoured. Crucially, this is the area where implementation is most often patchy. As a result, the experienced family business adviser will help the parties build follow-up reviews into the settlement to ensure that the relationship elements are actually delivered.

When the settlement cannot be reached

By contrast, not every family business dispute settles. Specifically, where the parties cannot agree, the case proceeds to judgment. Importantly, even unsuccessful settlement discussions are usually worthwhile. Specifically, they clarify the issues, test the legal arguments, and preserve the costs position. As a result, parties who have engaged in settlement discussions in good faith are in a much better position on costs if the case proceeds to trial.

Crucially, where the settlement discussions fail, the parties should review what went wrong before resuming litigation. Specifically, was the failure due to one side’s position being unrealistic? Was the failure due to a particular issue that could be carved out and litigated separately? Was the failure due to one party not being ready to settle? Importantly, the answers to these questions affect how the litigation should be conducted going forward. For more on the litigation context, see unfair prejudice petitions.

The role of advisers in settlement

Importantly, the role of advisers in family business settlements is particularly demanding. Specifically, the advisers need to combine legal expertise, commercial judgment and an understanding of the family dynamics. As a result, the choice of advisers is one of the most important decisions in the settlement process.

In practice, the most useful advisers in family business settlements have several characteristics. First, they understand family business disputes specifically rather than commercial disputes generally. Second, they are skilled at mediation advocacy as well as litigation. Third, they understand the tax and structuring implications of different settlement structures. Fourth, they have the seniority and credibility to give difficult advice when it is needed. Importantly, taking advice from a direct access barrister with family business experience often produces a sharper strategic picture than relying on general commercial advisers alone.

Frequently asked questions

What should a family business settlement agreement contain?

Typically, a family business settlement agreement should contain financial provisions for any share buyout, governance provisions to prevent future disputes, relationship commitments about future conduct, and legal mechanics including a full and final release, confidentiality, non-disparagement and dispute resolution clauses. Importantly, the best settlement agreements address the underlying causes of the dispute, not just the symptoms.

What is a Tomlin order?

In short, a Tomlin order is a court order that stays existing proceedings on the terms of a schedule attached to the order. Specifically, the schedule sets out the agreed settlement and remains confidential, where the order itself becomes a matter of public record. Importantly, this allows the settlement to be enforceable as a court order while keeping the financial terms private. As a result, Tomlin orders are widely used in family business settlements where proceedings have already been issued.

How long does it take to draft a settlement agreement?

Generally, a well-drafted family business settlement agreement is drafted on the day of the mediation, with the parties signing before they leave. Specifically, the headline terms are usually agreed in the afternoon and the drafting continues into the evening. Importantly, leaving the drafting until after the mediation often produces problems. By contrast, the discipline of finalising the document on the day forces the parties to commit and prevents second thoughts from undermining the deal.

What if the settlement breaks down?

Crucially, where the settlement breaks down, the consequences depend on the form the settlement took. Specifically, where the settlement is a stand-alone contract, the innocent party can sue for breach of contract. Where the settlement is a Tomlin order, the innocent party can apply to enforce the order. Importantly, the settlement should include its own dispute resolution mechanism, typically requiring mediation before any enforcement proceedings. As a result, the parties have a structured route to resolving disputes about the settlement itself.

Can a family business settlement be challenged after it is signed?

Generally, no. Specifically, settlement agreements are enforceable as contracts and can only be set aside on limited grounds such as fraud, misrepresentation or duress. Importantly, this is why the warranties and indemnities in the settlement agreement matter. By contrast, simple regret after signing is not a basis for challenging the agreement. As a result, the parties should be confident that they understand the deal before they sign.

Further reading on this site

• Family Business Disputes (main page)
• Why Mediation Is Usually the Right Starting Point
• What to Expect at a Family Business Mediation
• Unfair Prejudice Petitions
• Family Business Valuation
• The Cost of Family Business Litigation
• Shareholders’ Agreements
• Family Constitutions and Family Forums
• The Role of the Non-Executive Director
• The Have and Have-Not Pattern
• Mediation Advocacy
• Direct Access Barrister

Get advice on your situation

A well-drafted settlement agreement is the foundation on which the family business moves forward after a dispute. Specifically, the quality of the settlement determines whether the dispute ends or continues in a different form. As a result, early specialist advice on settlement is one of the most valuable investments you can make. 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 settlement 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.