Family business - Splitting up a family and a business, need advice!

[Snoopydog]

Hello there, new to the forum and just looking for some advice: Here's our situation.

We have a decades old family business which was inherited by two sisters, 50% shareholdings each and a Directorship each.

One of the sisters (Jill) worked (part-time) in an entry level manufacturing role but held the title and unfairly earned the salary of a Director, the other sister is my mother who held the title of Director and actually fully undertook that role taking all of the risk and all of the responsibility of running the business.

Jill has now passed away leaving all of her shareholdings to one of her children (Daniel), my mother wishes now to retire and leave her shareholdings to myself and my sister (who is a co-director with our mother), we would receive 25% shareholdings each, and as I am now practically running the business with my sister will become a Director in due course.

Daniel has shown no ability or interest in running the business and is a pretty unpleasant individual that we would rather not be in business with, his side of the family have other members working in part-time roles who are also lazy and unproductive, we can see history repeating itself here with Daniel insisting on becoming a Director and taking the associated salary (which will be in name only, as with his mother) whilst we do all the actual hard work, he's also going to be taking dividends for his 50% shareholding and this is going to become a very unfair situation.

There are historical personal issues with this individual as well, if something should happen to us we do not want our children to be associated with this character, we understand that a 75% shareholding would be needed for overall control of the company otherwise any disagreements with regard to the running of the business would end up in a stalemate, as we cannot achieve this we want to know what our escape options might be.

The business is and always has been profitable and we are perfectly capable of setting up a new business and carrying on by ourselves with the staff members that want to join us, but it is a shame to leave behind the business name and reputation and leave Daniel behind to destroy what was a great business and let down established customers; so ultimately we'd love to save the company, but.......if we cannot, then ideally we would like to initiate a Solvent demerger whereby the company was dissolved and assets shared, then we can start a new business and if he wants to, he can do the same.

Happy to answer any questions but if somebody might have a clue how else we might escape from this mess we'd really love to hear from you.

Thanks

Snoopy

 

[ChrisCallaghan]

Hi @Snoopydog ,

Welcome to UKBF.

.if we cannot, then ideally we would like to initiate a Solvent demerger whereby the company was dissolved and assets shared, then we can start a new business and if he wants to, he can do the same.

Should that be needed, I would be happy to offer you some advise - it would likely be that a Members Voluntary Liquidation would the process to achieve that.

Before it comes to that though, perhaps @The Resolver may be able to offer some advice on your options and how to approach Daniel.

Have you and sister considered making an offer to buy out Daniel?

 

[Paul Kelly ICHYB]

He cannot automatically assume that he will be a director. This will difficult because of the 50/50 share split.

Pay yourself decent wages and declare basic dividends.

Also, offer to buy him out over a period of time (if you have the money, maybe quickly!)

 

[fisicx]

@Snoopydog you need to separate the three components: director, shareholder and employee.

Directors run the business on behalf of the shareholders. The shareholders own the business.

Directors do not have to be shareholders and shareholders do not need to be directors. They are two totally separate things.

Employees are paid a wage. Directors earn nothing (but can be paid for carrying out their duties as a director).

If this Daniel is a shareholder they get dividends. If they are not a director that's all they get. If they are an employee they can be sacked.

If your mother sells you her shares an AGM/EGM can then be called with a resolution to make you and your sister directors. Daniel can vote against but it would be 2 against 1 so you can't lose.

You can then go about getting rid of the lazy and unproductive workers.

 

[The Resolver]

The usual initial question is whether there is a Shareholders Agreement in place, I will for now assume not.

The next question is whether the Articles of Association are the standard Model Articles or more bespoke. and ,if the latter, whther they include rules on transmission of shares on death such as to give an option to the other shareholdres to acquire the deceased's shares.,

If you PM me the name of the compaany in confidence and I will take a look at the Articles from the Companies House register.

Directorships cease on death. So unless there has been a Resolution to appoint the son of your Aunt, either your mother is the sole Director or, because you mention your sister as being Director, your mother and your sister comprise the whole Board. This means you control the hiring and firing of employees (but taking advice to ensure firing is done fairly) and ,importantly deciding on the amount of dividends to distribute,

Daniel cannot become a Director without a vote in support from your mother.

Liquidation requires a 75% minimum vote so you can't force that without Daniel's agreement,

You do have options to isssue proceedings in court for an Order that the company should be wound up but that trequires a lot fo fees and to be avoided when there are other strategies to , say, encourage a buyout.. You would be free to set up a competing bsuiness so long as you resign your Directorship (as otherwise you would be in breach of your duties as a Director). The strategy to adopt as to exiting and starting afresh depends very much on the nature of the business.

You can book yourself in for a free 30 mn advice call with me on the link in my sig below

 

[Snoopydog]

Hi @Snoopydog ,

Welcome to UKBF.



Should that be needed, I would be happy to offer you some advise - it would likely be that a Members Voluntary Liquidation would the process to achieve that.

Before it comes to that though, perhaps @The Resolver may be able to offer some advice on your options and how to approach Daniel.

Have you and sister considered making an offer to buy out Daniel?

 

[Gyumri]

We have a decades old family business which was inherited by two sisters, 50% shareholdings each and a Directorship each.

As Jill has died there will likely be inheritance tax to pay unless Jill's estate can claim business property relief - and it doesn't sound like that type of business.

So the tax position should be sorted out as well, because Jill's estate is now the owner of 50% of the company. If the shares are not worth much being a private company with low value assets then there won't be much inheritance tax to pay.

@The Resolver should be able to give you a good steer as to how to effect a clean break with your relatives.

 

[Michael Loveridge]

Yes, the obvious solution is to buy Daniel's shares. If you can't do so yourself then in certain circumstances it may be possible for the company to buy the shares if it has sufficient reserves.

Has Daniel been asked if he would be willing, in principle, to sell?

 

[brucegreig]

I don't have a huge amount to add to what's been said, other than to reiterate that there should be a financial settlement possible. There should be a price at which one of you is willing to sell to the other. As everyone knows, family disputes can get incredibly fraught, and the underlying issue gets easily overshadowed by perceived slights and unfairness, making it very difficult to resolve rationally. I have seen truly horrendous consequences (e.g. grandparents never seeing their grandkids ever again) stemming from what would otherwise be fairly innocuous commercial disputes. And legal costs can quickly get into the tens-of-thousands for each side, which can also make it hard to settle.

If everyone has the nerve for it, then a Texas Shootout is one elegant mechanism to quickly reach an agreement. You agree in advance to the following: You offer Daniel £x to buy him out. He agrees, before hearing your offer, that he will either accept your offer and sell at that price, or buy you out at the same price. Forces you to make a reasonable offer. But only works if both sides have access to funds to actually make the purchase.

I have also been tinkering with an AI tool which might help in these situations. I have let my UKBF membership lapse so I can't post a link here, but DM me if you'd like to hear more about it.


Bruce
________
Commercial mediator

 

[Daybooks]

If your mother sells you her shares an AGM/EGM can then be called with a resolution to make you and your sister directors. Daniel can vote against but it would be 2 against 1 so you can't lose.

Daniel would probably just call for a poll vote rather than a show of hands and it’s stalemate.

 

[fisicx]

Daniel would probably just call for a poll vote rather than a show of hands and it’s stalemate.

How would that work? There would only be 3 shareholders.

 

[Daybooks]

How would that work? There would only be 3 shareholders.

The poll vote is based on the number of voting shares held. Therefore despite being outnumbered on show of hands there is deadlock on shares. He has 50% on his own and the other two also have 50% if acting together.

 

[Gyumri]

If everyone has the nerve for it, then a Texas Shootout is one elegant mechanism to quickly reach an agreement. You agree in advance to the following: You offer Daniel £x to buy him out. He agrees, before hearing your offer, that he will either accept your offer and sell at that price, or buy you out at the same price.

An agreement to agree is not an enforceable agreement so if either party decides not to engage in the shootout then they would have both shot themselves in the foot.

It might however be legal in Texas, because there you can be shot for any reason.

 

[The Resolver]

An agreement to agree is not an enforceable agreement so if either party decides not to engage in the shootout then they would have both shot themselves in the foot.

It might however be legal in Texas, because there you can be shot for any reason.

What Bruce said is not unusual and has a sort of sense about it,. If you think the price to sell at is £x then if I don't want to buy then you agree to buy me out at that price .It helps keep the parties focuesed on valung more reeasonable . If properly drawn up its not an agreement to agree but a binding commitment. As it happens I don;t like it. Far better is to commit to some independent joint valuation, although again not my preferred practice, The problem is there is no consensus of what is value just different methods to reach a figure. Far better, in my view, is to negotiate by applying factors outside of value to attract consensus, For example, a non-compete clause by a selling shareholder whose work with a competitor can damage the tading of the company