Shareholder disputes often underline failed family businesses

Why do less than a third of family businesses survive into the third generation? Ok, the typical reasons are that many sell out, or collapse. But underlying these reasons is the much less well-known phenomenon of disputes between family shareholders that can lead to failure.

Howard Hackney, a UK-based accountant and family business specialist, reckons that shareholder disputes are often not appreciated enough as a reason behind failed businesses.  “Shareholder disputes between family members are more common than most people think. And they are a big reason why so many family businesses don’t survive more than a couple of generations.”

Hackney, who runs his own accountancy and consultancy business, says it’s not unusual for family members with shares in a business to act irrationally, and not in the interest of the business. This is where you get big problems, he says.

“I know of one case involving a firm with £30 million-plus turnover and employing 200 people. One family member, who was a shareholder but not directly involved in the business, took the company to court to get what she felt was a fair price for her shareholding, even after being told to do so could cost millions in legal fees and could bankrupt the business. Her attitude was that it didn’t matter – ‘I’ve got nothing, so who cares’,”.

Hackney is employed by many businesses  in drafting agreements involving internal markets for shares within family businesses. He says these agreements are more likely to work when they are simple and when all parties involved have been properly consulted. “The more complicated the structure around internal markets for shares, the more likely it will fail, or at least be challenged,” he says.

Complicated structures often lead to disputes where lawyers get involved. “The worse cases involving share disputes, which have become entrenched, and where and when there are lawyers involved who are inexperienced in the nuances of family businesses. Often these cases become almost impossible to unlock.”

Hackney says that lawyers will be involved in around 50% of cases he sees involving share disputes. “There’s normally some resolution before the usual unfair prejudice action actually gets to court, but not before huge legal costs have been paid and a huge emotional upheaval for both sides,” he adds.

“Many of these cases could have been resolved far earlier at a lower cost and less angst with the involvement of some form of ‘honest broker’. I always stress at the outset of any assignment the need for compromise and that the ultimate outcome will be an ‘equality of unhappiness’.”