Family businesses - get it in writing!

Family businesses are a popular choice for those with the confidence and conviction to forge a career either by starting out with parents and siblings or, more typically, children joining the family business ultimately with a view to taking over when their parents retire. Significant UK family businesses include shoe retailer Clarks, cheap fashion chain Primark, and baked goods company Warburton’s.

Working in the family has some considerable benefits, such as knowing the background of the people within the business, already having a good relationship with them, as well as being reassured of shared standards in key qualities including trust and reliability. Perhaps one of the most notable benefits is that of a family member learning the business from an early age and being willing to invest considerably more time and effort in the business with the view that, hopefully, one day those efforts will be rewarded by obtaining a share of the ownership of the business.

Unfortunately, however, another common feature of family businesses is family disputes and, where you have close relatives who know each other well, so too you are likely to have disputes arising. This likelihood is perhaps more increased in these businesses than if there were to be a degree of familial separation.

Consider a situation where a son joined his father in the family farming business when he was a teenager after leaving school. His other siblings made their own careers and did not work in the business, save for helping out a little every now and again. For over 40 years the son worked long hours for little pay on the understanding that he would inherit the business and the lion’s share of the farmland as the farmer and the owner, when his father retired. The relationship between father and son had been fractious at times and to ensure the son stayed on to help run the farm, the promise of inheritance from the father served as a dangled carrot. The relationship continued to deteriorate until in 2014 the father transferred all of his shares in the company and most of the land including the farmland to his other son!

The recent case of Gee v Gee and another [2018] EWHC 1393 (Ch) (11 June 2018) heard this scenario and justly applied the equitable remedy known as ‘Proprietary Estoppel’. This is where a Court may prevent or “estop” a person from going back on their word. The Court essentially uses its discretion to transfer rights to a Claimant provided certain elements are satisfied:

• one is given a clear assurance that they will acquire a right over property;
• they reasonably rely on the assurance;
• they act substantially to their detriment on the strength of the assurance; and
• it would be unconscionable to go back on the assurance.

In the case of Gee the son has worked his whole life on the farm, relying on his father’s promise that it would be his one day.  He had done this for little remuneration over the years in comparison to the hours worked and had given up the chance to gain other skills by working elsewhere.  The High Court held that the son had established Proprietary Estoppel and should receive a 52% shareholding in the family company and a 46% farmland interest. This would mean that the son would control the company and be able to buy out his siblings' property interests.

A difficult issue in awarding a remedy for estoppel is that unlike a contract it is not always apparent that a Claimant should receive the full measure of what they had expected. The purpose of the Court's jurisdiction is to avoid an unconscionable result, and to ensure that a remedy is based on proportionality. In the Gee case the son expected all of the shares of the company and the lion’s share of the farmland, the 52% and 46% ratio that he was awarded may have been below his expectations, however, it did provide a fair outcome for the other siblings too, who, despite not working in the business, may have had an expectation of some inheritance from it.

This case illustrates:

1. how equities can crystallise. Despite the father changing his mind, for decades he had intended this son would inherit a substantial part of the business;
2. representations need not always be a "stock phrase". While the son only pleaded six representations that the father had made in respect of the inheritance assurance he had given, the Court found that the assurance was repeated on other occasions, which were not specifically recalled. Family members had also understood for many years that this son would succeed his father, which corroborated this son's case;
3. a clean break may not always be the most appropriate remedy, for example, as in this case, where the farmland has development potential and therefore its future value may be significantly higher.

Whilst the Court made what many would consider to be a fair order in this case, a simple contract detailing the agreed terms between the family members prepared at the outset would have gone a long way to protecting the parties’ interests and would also probably have saved considerably on costs. If you have a family business or are thinking about starting one, come in to discuss the practicalities of doing this with our Corporate and Commercial team or contact Jon Rathbone on 01242 574244.