Simon Walsh is Partner in the Commercial Litigation & Dispute Resolution team, and Marilyn Bell is Partner and Head of the Family Law team, at law firm SA Law. In this article they illustrate how it’s more important than ever to take a holistic approach as businesses and individuals re-engage post-Lockdown.
We all know the Pandemic has impacted businesses’ plans for the future – whether changing market opportunities, or internal working practices, or both. But in a family run business the impacts become multi-layered: Covid is as likely to have shaken up family dynamics, and possibly business succession plans, as it is to have reduced cashflow and increased debt. It has never been more important to take a holistic approach to business and family life.
Take the example of a family-owned restaurant which had to close its doors during repeated lockdowns and miss out on months of precious income while it saw its balance sheet becoming loaded with government loans.
Dad founded the business and owns the majority of it. He had planned to pass his shares on to his eldest son. However, in the midst of the crisis it was his younger daughter who came up with the bright idea of turning to social media to promote her idea of premium, restaurant-quality special occasion meal-packs for customers to cook at home. She was an inspiration on Instagram, uploading daily photos of the dishes she and the staff devised. She was a fiend on Facebook, working hard to build up a following, listening to how hungry people with disposable cash wanted to celebrate even though they couldn’t go out. Her work led to the sale of hundreds of packs, bringing in vital cash that allowed the business to survive until it could welcome its old, and new, customers back in person.
Her brother just sat back and enjoyed the time off that furlough afforded him. Now Dad is thinking she would make a more appropriate heir to continue the family business name. How might this play out in terms of the legal and financial issues involved? What’s the best way to change strategy and avoid a family fallout that could put the business in jeopardy again when it needs to be generating income to support its additional loan repayments as well as the double whammy of staff shortages and increased costs on all fronts?
First, check any shareholder or partnership agreement for anything that might be required to implement a new strategy. For example, does a new business plan or ownership structure need unanimous approval, and are there terms that son could use to block daughter getting ‘his’ shares?
Employment contracts should also be reviewed. Also have any promises been made to the son about future promotions? Staff relationships are also important – are there employees who may be disgruntled by daughter being placed centre stage, particularly if someone feels she may take or compete for a role they felt sure of when they thought they were only up against the complacent son?
Succession planning and internal family matters are equally important. Any plan for future control and share of company ownership needs to be scenario-tested against divorce or deaths in the family.
The unmarried son might have been a bit lazy in the business but that is the only real issue with him. His bright, hardworking sister on the other hand, brings with her the tricky problem of a troubled marriage to an untrustworthy, money-grabbing husband. The rest of the family think he only married her for her money and he stands to get half of what she owns if they divorce. Shareholder agreements can be structured so that one shareholder cannot dispose of their shares without first offering them to the other shareholders. This would prevent her husband, in the event of a divorce, seeking half of the shares (albeit in practice that would be difficult for him to achieve in the family court) as control within a business is a relevant factor. He would have to base his claim on seeking half of the value of her shareholding as part of an equal share of matrimonial assets. If this happened, the business may want to consider how this could be funded. Is there sufficient liquidity in the business to pay the husband half the value of the shares? Could the business borrow money? Clearly a Post-Nup needs to be thought about and it could specify that the daughter’s shareholding in the company was excluded from any divorce settlement. Post-Nups are not yet legally binding and she would need detailed advice. Courts take notice of Post-Nups however as evidence of what was intended, but would still have to consider how the husband would be placed financially if the Post-Nup was followed. For example if the shares were the only valuable asset in the marriage, a family court might not want them excluded leaving the husband with nothing.
The take away is to understand how family and business issues interact, especially at times of significant change. The Pandemic has shaken up family as much as business life. Many businesses will be picking through the sorts of issues we’ve outlined above – and the key for them is to apply joined-up thinking between the professional and personal.
A last thought: as lawyers, we often see that the difference between a dispute and a smooth transition has a lot to do with how the difficult conversations are handled. Even if someone has scant grounds for suing, treat them badly and they are more likely to ‘have a go’. Conversely, even where the legal scenario is altogether trickier, treat a person with respect and grace and they are more likely to accept the change without creating conflict.