The Have and Have-Not Pattern in Family Businesses

The have and have-not pattern is one of the most predictable causes of family business disputes. Specifically, it describes the situation where some family members extract significant value from the business while others receive very little. Typically, the haves are the family members who work in the business and draw salaries, bonuses and benefits. By contrast, the have-nots are the family members who own shares but rely on dividends that never seem to be declared. As a result, the haves and the have-nots have very different experiences of the same business. Crucially, the pattern is so well established in family business law that it is the textbook fact pattern for unfair prejudice petitions.

This page explains what the have and have-not pattern looks like, why it develops, why it is so legally significant, and what families can do to address it before it becomes a dispute.

What the have and have-not pattern is

In short, the have and have-not pattern arises in any family business where the family members are split between those who work in the business and those who do not. Specifically, the working family members draw their financial return primarily through their employment. They receive salaries, bonuses, pension contributions, company cars, expense accounts and other benefits. As a result, their personal financial position grows whether or not the company pays dividends.

By contrast, the non-working family members hold shares but receive no salary. Their only financial return from the business is the dividend. As a result, if dividends are kept low or not declared at all, the non-working family members receive nothing from the business while the working family members continue to be well paid. Crucially, the haves and the have-nots are looking at the same business and seeing very different outcomes.

For the wider structural picture, see the three circles model, which explains why the family circle and the ownership circle pull in different directions on this question.

How the pattern usually develops

Importantly, the have and have-not pattern rarely develops out of bad faith. Typically, it emerges gradually, through a series of decisions that each seemed reasonable at the time. Specifically, the most common path is this.

First, the founder splits the shares between their children equally. Often, this is done out of a sense of family fairness. Crucially, equal shares are the most common starting point in family businesses. Second, one or more of the children join the business while others do not. As a result, the working children begin to draw salaries while the non-working children do not. Third, the working children’s salaries rise over time as their responsibilities grow. Likewise, benefits and bonuses are added. Meanwhile, dividends are often suppressed in favour of reinvesting profits in the business. As a result, the gap between what the working children receive and what the non-working children receive grows year by year. Crucially, by the time the issue is raised, the imbalance has often been embedded for decades.

Importantly, no individual decision in this sequence is necessarily wrong. By contrast, the cumulative effect is what creates the problem. For more on the dispute patterns that follow, see the common causes of family business disputes.

Why the working family members rarely see the imbalance

Crucially, the working family members usually do not see what they look like to the have-nots. Specifically, they see themselves as people who work hard for what they are paid. They are putting in the hours. They are taking the risks. They are carrying the responsibility. As a result, the salaries and benefits they receive feel earned. By contrast, from this perspective, the dividends that are not being paid feel like prudent business decisions to retain profits in the company.

Importantly, the working family members also typically do not have a complete picture of the imbalance. Specifically, they know what their salaries are. By contrast, they may not have stopped to calculate the cumulative gap between what they have received over twenty years and what the non-working siblings have received over the same period. Often, the figures, when laid out, are surprising even to the working family members themselves.

Why the have-nots usually do see it

By contrast, the have-nots typically see the imbalance very clearly. Specifically, they have watched their working siblings buy houses, take holidays and acquire cars that their dividends could never have funded. They have seen the business prosper. They have seen the working siblings’ standard of living rise alongside it. Meanwhile, their own returns from the business have been minimal. Crucially, the visible evidence of the gap is hard to ignore, even when the figures themselves are not disclosed.

Importantly, the have-nots often hold their tongue for years. Specifically, they may not want to disrupt the family relationship. They may feel reluctant to challenge a sibling they care about. They may believe the situation will eventually correct itself. By contrast, the grievance accumulates whether or not it is voiced. As a result, by the time the have-nots raise the issue, the underlying resentment is often well-developed.

The classic legal fact pattern

Crucially, the have and have-not pattern is the textbook fact pattern for unfair prejudice petitions under section 994 of the Companies Act 2006. Specifically, this is the area of family business law where the courts have provided the clearest guidance.

The leading case is Re Sam Weller & Sons Ltd [1990] Ch 682. There, the company was a third-generation family textile business in which three family members worked and three did not. Importantly, the working family members drew significant salaries and benefits, including a seaside holiday home for their personal use that had cost the company the equivalent of nearly ten years of dividend payments at the usual rate. Meanwhile, the non-working family members received only modest dividends. The court held that although the strict legal rights of all shareholders were identical, their interests differed. As a result, the non-workers’ interests were being unfairly prejudiced by the combination of low dividends and the diversion of value to the benefit of the workers. Crucially, the case established that the fair use of company assets, not just the strict legal rights attached to a shareholding, is part of what a member’s interests include.

Importantly, Re Sam Weller remains the archetypal authority on the have and have-not pattern. For the wider treatment, see unfair prejudice petitions in family business disputes.

Other leading cases on the same pattern

Importantly, several other cases have refined the law on the have and have-not pattern. Specifically, the following are worth noting.

First, Re Cumana Ltd [1986] BCLC 430 confirmed that excessive remuneration paid to working directors can constitute unfair prejudice to non-working shareholders. Specifically, the Court of Appeal held that paying salaries far above market rates while suppressing dividends is itself a form of unfair conduct. As a result, the legal protection for the have-nots does not depend on showing actual misappropriation. By contrast, it can be enough to show that the working family members have arranged their remuneration to deprive the non-workers of the return they would otherwise have received.

Second, Irvine v Irvine [2006] EWHC 406 (Ch) concerned two brothers who had been equal partners in an insurance broking business. There, the brother who worked in the business paid himself substantial sums while declaring minimal dividends. Crucially, the court held that the conduct amounted to unfair prejudice and ordered a buyout. Importantly, this case is particularly instructive for the position between working and non-working siblings.

Third, Fisher v Cadman [2005] EWHC 377 (Ch) concerned a sister who had tolerated for thirteen years her brothers’ failure to hold AGMs, provide information or declare meaningful dividends. The court held that the conduct amounted to unfair prejudice notwithstanding her long acquiescence. Crucially, the case confirms that the have-nots do not lose their rights by waiting too long to raise them. By contrast, the longer they wait, the more difficult the remedy can be in practical terms. For more on these and related cases, see the twenty-five most important family business cases.

The forms the imbalance can take

Importantly, the have and have-not pattern can manifest in several different forms. Specifically, the most common are these.

• First, salaries above market rate. Crucially, the working family members are paid more than they could earn for the same role elsewhere. As a result, the excess salary is in substance a distribution of profit to the workers only.
• Second, generous benefits and expenses. For example, company cars, private health insurance, expense accounts and other benefits that the non-workers cannot share in.
• Third, related-party transactions. Specifically, the company may rent property from the working family members at above-market rents, or buy services from companies they control. Importantly, these are often legitimate transactions but the pricing favours the workers.
• Fourth, the use of company assets for personal benefit. For example, holiday homes, yachts or hospitality boxes that the working family members enjoy while the non-workers do not.
• Fifth, the suppression of dividends. Often, this is justified on the basis of reinvestment in the business. Crucially, when combined with high salaries to the workers, dividend suppression has the effect of diverting value entirely to the working family members.
• Finally, control of information. Specifically, the working family members may withhold management accounts or refuse to explain their remuneration. As a result, the have-nots cannot easily verify whether the imbalance is reasonable.

Importantly, each of these elements on its own may have a legitimate commercial justification. By contrast, the cumulative effect of several together can shift the balance from acceptable family business practice to unfairly prejudicial conduct.

The valuation consequences

Crucially, the have and have-not pattern affects share valuation in two important ways. First, where the company has been run in a way that diverts value to the workers, the historic financial statements may understate the true value of the business. As a result, valuation in an unfair prejudice case may include adjustments for excessive remuneration, suppressed dividends and related-party transactions. Importantly, the court has wide discretion to make these adjustments.

Second, the valuation date in an unfair prejudice buyout is itself a strategic question. Specifically, the court may set the valuation date before the unfair conduct in order to capture the value the have-nots would have had but for the conduct. As a result, the have-nots can sometimes recover significantly more than the current value of their shares suggests. For more on the legal and valuation framework, see family business valuation in a dispute.

What the working family members should do

Importantly, working family members in a have and have-not situation can take steps that significantly reduce the risk of a dispute. Specifically, the following are most useful.

Audit the imbalance

First, the working family members should look honestly at the cumulative imbalance over the years. Specifically, what have they received in salaries, bonuses, benefits and expenses? What have the non-workers received in dividends over the same period? Crucially, the calculation often produces a striking figure. Importantly, until the working family members have done this exercise, they typically do not appreciate what the have-nots are seeing.

Bring salaries to market rate

Second, the working family members should make sure their salaries can be defended at market rate for the role they perform. Specifically, this means commissioning a market salary benchmark if necessary. Crucially, market-rate salaries are difficult to challenge. By contrast, salaries that cannot be defended at market rate are vulnerable to an unfair prejudice claim.

Adopt a clear dividend policy

Third, the working family members should agree a clear dividend policy with the non-working shareholders. Specifically, the policy should set out the proportion of profits to be paid as dividends, the timetable, and the basis on which it may change. Importantly, the policy does not commit the company to high dividends. By contrast, it provides predictability and a sense of fairness that defuses the have and have-not perception. For more on this, see shareholders’ agreements for family businesses.

Be transparent about related-party transactions

Fourth, the working family members should be transparent about any related-party transactions. Specifically, rents, service charges and other payments to companies they control should be at arm’s length and clearly disclosed. Crucially, the test is whether the transaction would withstand independent scrutiny.

Consider whether a buyout would be a better outcome

Finally, where the have and have-not pattern is entrenched, the working family members should consider whether a buyout of the have-nots at a fair price would be a better outcome than continued shared ownership. Specifically, a structured buyout often resolves the underlying conflict in a way that no amount of governance reform can. For more on this, see settling a family business dispute.

What the have-nots should do

By contrast, the have-nots can also take steps to address the pattern before it becomes a legal dispute. Specifically, the following are most useful.

• First, stay engaged. Importantly, attending general meetings, reading the accounts and asking reasonable questions throughout makes the position much stronger than re-engaging only when something has gone wrong.
• Second, raise the issue directly. Specifically, the have-nots who raise the issue early, calmly and in writing usually achieve a better outcome than those who say nothing for years and then raise it at the breaking point.
• Third, request information. Importantly, ask for the management accounts, the remuneration figures and the schedule of related-party transactions. Crucially, the request should be reasonable and proportionate.
• Fourth, take advice early. Specifically, an experienced barrister or mediator can help the have-nots identify what their rights are and what the most effective approach would be. Importantly, early advice from a direct access barrister does not commit you to litigation.
• Finally, consider whether a fair-value exit would be the right outcome. Crucially, the legal options include both staying in the business on better terms and leaving at a price that reflects the value that has been built up.

The role of governance in preventing the pattern

Crucially, the have and have-not pattern is one of the most preventable family business problems. Specifically, the right governance can address it from the outset. Importantly, the most effective measures are these.

First, a documented remuneration policy. Specifically, the policy sets out how working family members are paid, on what basis, and how their remuneration is reviewed. As a result, remuneration becomes a matter of governance rather than of opaque individual decisions. Second, a documented dividend policy, as discussed above. Third, regular transparency about both working family member remuneration and dividends, so that the have-nots are kept fully informed rather than left to wonder. Fourth, a family forum or family council that includes the have-nots, so that they have a voice in the discussion. For more on these structures, see family constitutions and family forums and preventing family business disputes.

Frequently asked questions

What is the have and have-not pattern in a family business?

In short, the have and have-not pattern arises where some family members extract significant value from the business through salaries, bonuses and benefits while other family members hold shares but receive minimal returns. Specifically, the imbalance usually develops gradually over years. Crucially, it is the textbook fact pattern for unfair prejudice petitions under section 994 of the Companies Act 2006.

Is it unfair prejudice to pay working family members more than non-working ones?

Not by itself. Specifically, working family members are entitled to be paid for their work. By contrast, where the salaries are above market rate, the benefits are generous, the dividends are suppressed and the cumulative effect is to deprive the non-workers of the return they would otherwise have received, the courts have repeatedly held that this can amount to unfair prejudice. The leading case is Re Sam Weller & Sons Ltd [1990] Ch 682.

What can the have-nots do legally?

Typically, the have-nots have a potential unfair prejudice petition under section 994 of the Companies Act 2006. Specifically, the most common remedy is a court-ordered buyout at a fair price. Importantly, the price may include adjustments for excessive remuneration, suppressed dividends and the use of company assets. For more on this, see unfair prejudice petitions in family business disputes.

Can the have and have-not pattern be resolved without going to court?

Yes, in most cases. Specifically, the pattern is usually best addressed through a combination of governance reform, transparency, fair remuneration benchmarking, a clear dividend policy and, where appropriate, a structured buyout. Importantly, mediation is almost always a better forum than litigation for resolving these disputes. For more on this, see why mediation is usually the right starting point.

How long can the have-nots leave it before raising the issue?

In principle, the have-nots can raise the issue at any time, though delay can affect the practical remedy. Specifically, Fisher v Cadman confirmed that long acquiescence does not by itself defeat an unfair prejudice claim. However, the longer the delay, the more entrenched the conduct becomes and the harder a clean resolution may be. As a result, the practical advice is to raise the issue as early as the have-nots feel comfortable doing so.

Further reading on this site

• Family Business Disputes (main page)
• The Three Circles Model
• The Common Causes of Family Business Disputes
• The Passive Shareholder
• Unfair Prejudice Petitions
• Quasi-Partnership in Family Companies
• Shareholders’ Agreements
• Family Business Valuation
• Why Mediation Is Usually the Right Starting Point
• Settling a Family Business Dispute
• The Most Important Family Business Cases
• Preventing Family Business Disputes

Get advice on your situation

If you can see a have and have-not pattern developing in your family business, whether as one of the haves or one of the have-nots, 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 have and have-not pattern 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.