We mustn't forget that family business disputes have no winners

There are several major casualties of such disputes. Relationships weaken, there are socially adverse implications, and the stress presumably takes a toll on the health of disputants, all of which can have an impact on a business and its stakeholders—such as public shareholders, lenders and management team members.

The causes: Such disputes have various causes, including lack of cultural alignment, greed, ego (even cussedness) and several other factors. Additionally, very often, the next generation’s entry (and the consequential shared leadership) is a trigger, as also situations where economic interests are not aligned with value creation. In many cases, the induction of external expertise and a lack of clear communication escalates solvable issues into a crisis.

The ‘harder’ causes of disputes include ‘muddied’ holding structures, such as those featuring intricate cross-holdings, Hindu Undivided Family (HUF) holdings of shares, shareholding structures that are not in sync with intended holdings, shares held via several entities, and of course, a missing shareholder agreement and/or family charter.

And when disputes arise …: The question that arises when a dispute surfaces is what should be done, given the consequences of leaving conflicts unresolved for an extended amount of time. Since arbitration (and/or litigation) is a relationship destroyer and often a value destroyer as well, the ‘going in’ approach should be to aim for an expeditious resolution, which is the biggest challenge in many cases; indeed, this is where the role of informal or formal mediation (and/or advisors) becomes invaluable.

Once communication lines are open, the other aspect is to recognize that taking unbending positions is not advisable; there has to be an element of give-and-take, and parties should attempt at being reasonable; the latter is more likely to happen with external parties involved, preferably someone within the family (or extended family), or even a family friend who could act as a buffer and sounding board. Advisors and/or law firms with a practical and ‘dispute closure’ approach are often helpful, too, but unfortunately, that does not always happen satisfactorily, and hence the need to choose such advisors very carefully.

Incidentally, as recent case circumstances have shown, the role of independent directors in the context of family disputes is very sensitive. Although matters at the shareholders’ level technically do not concern the company, the reality is that they do have an impact, and in appropriate cases, independent directors may need to take a view on what should be done and sometimes seek external legal advice.

Facets and challenges of dispute resolution: One of the critical aspects to recognize in resolving family disputes, particularly where businesses are involved, is that the process is often long and arduous due to a variety of complexities. For example, if a family dispute involves splitting a company into two or more parts through a demerger, one needs to recognize that the NCLT process could take as much as 6-8 months and sometimes longer; this time-line can get lengthened if it is a listed company, in which case there are several other aspects to consider too, especially the interests of minority shareholders and lenders. There are also, typically, costs involved in family settlements (such as stamp duty), and so a family settlement framework or agreement needs to carefully provide for these details, including specifying who will bear this cost. Another aspect is the uncertainty of tax implications, given the realities of India’s tax system; in such a case, how does one provide for these uncertainties in a family settlement agreement? There are no ‘one size fits all’ answers and one has to evolve a framework based on the facts and circumstances of each case, apart from the imperatives, mindset and ‘closure’ inclination of the parties involved.

The manner of running a business and regulating relationships in the interregnum between an ‘in principle’ agreement and actual execution is often a significant challenge. Here again, a master family agreement (MFA) with details worked out through a framework provided in the MFA often becomes crucial; experience has shown that the formal minuting of decisions and a clearly articulated execution framework are important to mitigate the possibility of the process getting derailed.

In conclusion: Large families, especially those with several businesses, would do well to look at formalizing relationships, creating cleaner holding structures, and taking all other steps possible to prevent such disputes from arising. They also need to cushion the impact of those which have already arisen through a ‘we need to resolve this soon’ approach. This is crucial, given the number of stakeholders involved; the interests of lenders, minority shareholders and company employees should be paramount.

To conclude, it would be useful to bear in mind, once again, that there are no winners in family disputes.