Why shareholder agreements are vital in family businesses

In any business, when shareholder disputes arise, it‘s always a difficult time. However, when the owners of a business are also members of the same family, then things can turn especially nasty.

The benefits of relying on family members in business affairs are evident in the hallmarks of greater trust and stronger commitment to the success of the business. However, when problems at home spill over into the office, there is rarely a happy outcome.

The Patak’s family business dispute

This was highlighted in a high-profile case surrounding the family-owned Indian food business Patak’s. This business was developed from a small family enterprise making curry sauces, into a multi-million pound business, but things turned sour when the patriarch of the company died, and the shares in the business were being distributed between the siblings. In the end, a protracted case in the High Court led to two of the siblings being awarded multi-million pound settlements in 2006, but at the expense of family unity.

But we’re family, why do we need a shareholder agreement?

More often than not, when dealing with family business owners, there is a reluctance to formalise business relationships with shareholder agreements because of those close family connections.

However, time and time again, we see the fallout from a family breakdown in the business arena can have far-reaching consequences, very often as a result of misunderstandings as simple as who was going to inherit what.

Often it is difficult to separate family life from business life, but providing for a worst case scenario with a shareholder agreement is not a sign of distrust, it’s simply good business sense.

Use the good times

There is no better time to document your wishes than when things are going well and everyone is in agreement. Importantly, the potential future legal expenses of not doing so will always significantly outweigh any immediate legal costs.

If you would like more advice on shareholder agreements, or any other business matter, please contact David Filmer on 01772 258321