The personal nature of a family business means that when a dispute arises, it requires a bespoke and tailored approach to resolving it. Navigating the family dynamics at play while managing the day-to-day operations of the business requires careful balancing and discretion. Whereas in arm's-length commercial disputes, parties may be happy to go their separate ways and deal with their disagreements in public, parties to a family business dispute are, usually, keen to find ways to resolve the dispute together with repairing or maintaining amicable relations between family members and, if possible, doing so more privately.
Court proceedings are sometimes the most appropriate means of determining a family business dispute, but the discretion and relative flexibility of arbitration can make it an ideal forum for resolving such disputes.
Keeping things private
Unlike court proceedings (which are usually accessible to the public), arbitration is essentially a private process in which the subject-matter, hearings and outcome of proceedings remain confidential to the parties involved.
For disputes involving families who run large, successful businesses or have significant commercial investments, often the most important issue is achieving a resolution in a private setting, including because of:
- Protection of confidential information: Family business disputes inevitably involve sensitive personal and financial information. Keeping these details private helps protect individuals and corporations from unwanted public scrutiny.
- Family relationships: Avoiding a public airing of grievances and personal issues can help preserve or repair family relationships.
- Reputation management: Confidentiality protections ensure that potentially damaging information or false allegations do not become public, helping to protect any public image as well as the reputation of the businesses in which individuals are invested.
- Business interests: Ensuring confidentiality helps mitigate the risk of any negative effect on business operations or share prices and can minimise the effect of a dispute on the day-to-day commercial operation of the business in question.
A speedier outcome
It is possible for arbitration to result in a quicker resolution as compared to court proceedings. This can be particularly important for family businesses given the need to keep the business operating as usual. Avoiding protracted litigation, and the associated impact on both the business and family relationships, allows the family to move on with their lives.
Flexibility and control
Parties to arbitration have more control over the process than with more rigid court procedures and generally have more of a say over how the proceedings are run.
This includes having input into the selection of the arbitral tribunal, allowing parties to nominate arbitrators who might have a particular understanding of the sector in which the family business operates or familiarity with family businesses generally.
The same remedies?
Before embarking on any form of dispute resolution (and ideally when setting up corporate structures), it is critical that parties consider what their desired outcomes are and whether the remedies necessary for achieving those outcomes are available and enforceable. Many of the remedies available in litigation are also available in arbitration. However, there are some exceptions to be aware of.
In the context of family business disputes, what families want to achieve is often not simply a monetary outcome. A resolution may need to account for who will remain shareholder(s) in the business, how to deal with any exiting shareholder(s) or directors and whether there is an agreement for the succession of the business which should be honoured. These outcomes may engage the remedies relating to unfair prejudice or specific performance:
Unfair prejudice
Disputes between shareholders are often brought by what are known as unfair prejudice claims under Section 994 of the Companies Act 2006. Such a petition is brought when a shareholder believes that the company's affairs are being conducted in a manner that is harmful to their interests as a shareholder. These claims can provide a route to redress for minority shareholders who may otherwise lack a means of influencing the company's affairs, and can be used by minority shareholders to raise issues including breaches of directors' duties, exclusion from management or the misapplication of company assets.
Remedies for a successful unfair prejudice claim often lead to the purchase of the aggrieved shareholder's shares at a fair value or, in certain cases, the winding up of the company.
Whilst an arbitral tribunal does not have the power to grant all remedies that might be sought pursuant to an unfair prejudice petition (such as a winding up order), case law suggests that an unfair prejudice petition could be referred to arbitration. In such situations, it may be most appropriate for the underlying subject-matter to be determined by the arbitral tribunal and the question of the appropriate remedy to be referred to the court for determination (at which point it would, again, likely become public). Given this nuance, it is worth considering at an early stage whether the desired remedy is most effectively achieved through arbitration or litigation.
Specific performance
Specific performance refers to an order requiring a party to perform a specific act, usually as stipulated in a contract. This remedy is particularly relevant when monetary damages are insufficient to address the harm caused by the breach of contract. This might relate, for example, to the transfer of shares, the adherence to non-compete clauses, or the transfer of control or ownership of a business according to the terms of the succession agreement.
If the relevant legal tests are met, this remedy is available in arbitration (as it is in court proceedings), subject to the laws of the jurisdiction governing the arbitration agreement and the terms of an arbitration agreement (or the parties' agreement to refer the dispute to arbitration).
However, if specific performance is likely to involve enforcement in another jurisdiction, further thought must be given to the appropriateness of arbitration. Not all national courts will enforce an arbitral tribunal's award for specific performance, some will have specific requirements that must be met to enforce this type of award and there may be additional legal tests to meet for a national court to recognise an arbitral award as a precursor to enforcing it. Indeed, even in the English courts, steps to enforce an arbitral award through the courts will then mean that the dispute becomes public.
The right forum?
While arbitration will not always be the most appropriate or cost-effective means of resolving family business disputes, and is not therefore a panacea, it is still likely to prove attractive for many family businesses faced with the alternative of airing their disputes in a more public court setting.
The ability to resolve disputes quickly, confidentially and out of the public domain can generally be a positive decision both for family companies that are in dispute and the familial relationships that are strained as a result.
This article is adapted from "Business disputes in a family office and high net worth context", first published in "The Guide to High-Net-Worth Clients and Arbitration". If you are interested in finding out more about arbitrations in the context of family business disputes, read the full article.