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Deadlock Forces Sale When Family Inherits Business

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

When a family business is handed down and ownership is split between two or more members of the next generation, the result can all too often be discord. Normally, this can be resolved by one party buying out the other, but when this does not occur, the result can be a disaster, as a recent case shows.

It involved a family company owned by a man who died in 2001, leaving a controlling interest in the company to his children by way of a trust. Gradually, one of the children took over running the business and brought in her husband (an accountant) to help, although all three children were directors.

Her two younger sisters became increasingly disaffected by the arrangement. Things deteriorated to the extent that the two factions held ‘rival’ board meetings and refused to recognise the legitimacy of the ‘other side’s’ meetings.

Considering the impasse to be insoluble and the company no longer governable, the two sisters brought a petition seeking to have the company wound up. The court granted their application.

The succession arrangements for a family business often need to be approached with delicacy and a lot of forethought. If difficulties are anticipated, there are a number of means by which the need for long and expensive litigation can be avoided: for example, the creation of a shareholders’ agreement with appropriate terms for dealing with shareholder deadlock.

If you are considering passing your business on to your family, Clare Towers can advise you and help you avoid the potential pitfalls. In general, the earlier thought is given to the relevant issues, the better.

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