How to short-circuit family disputes, avoid a 'Succession'-worthy mess

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Family businesses are one of the oldest and most prevalent forms of business in the world. They range from small convenience stores to large multinational corporations such as Rogers Communications or Walmart. In a family business, family members typically retain control and power over decision making.

We often see famous and very public family business disputes played out in the media. Litigating these disputes in court and under public scrutiny can severely damage a company’s brand, cause key employees to leave and result in irreparable harm to the family and its business relationships.

Sources of disputes

Disputes can arise for many reasons, including differing or competing perspectives (e.g., owner vs. manager), values, changing priorities, family dynamics, lack of written agreements and policies, lack of transparency, secret transactions, miscommunication and changing circumstances such as succession or death of a key stakeholder.

Such disputes can be complex and challenging because decisions in a family enterprise are not based purely on financial factors. Family history, relationships, dynasty and other emotional and subjective factors play a part.

Preventative measures

Advisors often recommend that family enterprises professionalize governance by adopting and implementing a corporate-type structure with regular and duly called management, director(s) and shareholder meetings and family business meetings. Written agreements and policies are put into place. Formal processes are introduced to improve communication, learn about family relationship patterns and plan for succession and estate issues. All of these practices also help to prevent disputes.

In addition to these moves toward a more professionalized company, I also advocate contingency planning for disputes, such as how to manage future disputes and which dispute resolution processes will be used, including both informal and formal processes. Good dispute planning makes good business sense.

Early dispute resolution through dispute boards

Devising processes for early dispute resolution has been well developed in international construction projects. Dispute boards are utilized and have yielded successful outcomes through both informal and formal processes.

Dispute boards and related agreements are ideal for projects that involve continued interactions and relationships. A dispute board comprises an independent committee established by the parties to help avoid and overcome disagreements or disputes that may arise during the execution of a contract.

The purpose of a dispute board is to help preserve business relationships while providing efficient and pro-active resolution mechanisms as agreed to by the parties. Properly constituted dispute boards and dispute resolution agreements can result in reduced legal costs and less expenditure of time dealing with disputes and litigation and better family relationships.

In family enterprises, after all, ongoing relationships with family members and shareholders are paramount to the continued success of the business.

Dispute planning in family enterprises

Dispute resolution pathways are created by agreement and typically involve informal processes such as mediation, which can result in private party-made collaborative results or a neutral third-party recommendation on how to resolve the issue, which would not be final or binding.

In addition, dispute resolution processes typically also include a formal process such as arbitration. Arbitration can be very effective as a confidential and private adjudication, in which the process can be designed to meet the parties and the issues involved.

Informal processes can be initiated quickly and involve key family stakeholders, trusted advisors, business managers and a named mediator or one selected from a roster of mediators. The more formal process of arbitration involves both procedural and substantive aspects, such as the governing arbitration law, the arbitrator(s), the location and reference procedural rules and whether the decision is final and binding.

The objective of planning for disputes and dispute resolution agreements is to avoid litigation and encourage negotiation and settlement of disputes informally, or formally where necessary. Dispute resolution agreements require clearly defined and stepped processes or procedures, with defined deadlines. The application of the agreement can serve to deter conflicts and increase understanding and communication. This in turn leads to more efficient management, less time away from the company’s core business and operations, reduced legal expense and also much less havoc on family dynamics. More formal adjudicative processes, such as arbitration, are invoked only if needed.

The planning and agreement process I propose is more than the usual “refer all disputes to arbitration clauses” often found in shareholders’ agreements. My planning and agreement process seeks to have family shareholders adopt a mindset in which they are prepared to consider resolving disputes outside of courts, be collaborative and understand different viewpoints with the assistance of selected conflict resolution experts and trusted advisors. The agreement(s) become part of shareholder agreements and other agreements.

Putting together a dispute advisory board

In certain circumstances the establishment of a dispute advisory board including key family stakeholders, one or more named conflict resolution experts, and trusted advisors with knowledge of the family and the business will be helpful as part of the dispute resolution agreements. In terms of the dispute resolution agreements, the first step is typically informal and involves direct meetings (for instance, with the trusted advisor) to discuss and define the dispute parameters and the necessary parties.

Next would be meetings (informal and collaborative) with a mediator who can build trust and confidence in the process and work with the parties to define the issues, understand why the disputes arose, and also consider (brainstorm) various scenarios and possible outcomes and agreements. There can also be the option of requesting a neutral third-party recommendation on how to resolve the issue(s) that would be non-binding. In situations where the informal and more collaborative processes do not work, provision is made to refer the dispute(s) to arbitration in which the arbitrator defines a streamlined and efficient process and is given the authority to make a binding and final decision. As part of the dispute planning process a roster of experienced arbitrators can be selected along with an appointing authority designated, choice of law and procedural rules that would be adopted

The planning process ensures that time is spent considering what kinds of disputes might arise and which conflict resolution experts would be best suited either because of their skills or knowledge of the business or industry.

Once a dispute process is activated, the conflict resolution expert becomes formally involved. The resolution expert, i.e. a mediator or arbitrator, completes a retainer agreement for the particular dispute process with the parties.

The dispute resolution agreements ensure that disputes are dealt with efficiently and confidentially with a view toward preserving existing relationships and working to repair relationships that may have been damaged.

I strongly believe that this type contingency planning for disputes in a family business is just as important as tax, estate, succession and/or financial planning. It will help ensure that the entrepreneurial families’ hard work, successes and legacy mean something more than a court decision in shareholder dispute litigation or a negative media news story. Its goal is the continued success of generational family businesses and enterprises.

Robin A. Dodokin, LL.B, LL.M, FCIArb, Q.Arb and Q.Med., has more than 29 years of dispute resolution experience as a commercial litigator, mediator and arbitrator and certified family business advisor. She is a Fellow of the Chartered Institute of Arbitrators and has been designated as a Qualified Arbitrator and Qualified Mediator by the ADR Institute of Canada. She is a member of the arbitrator roster at Arbitration Place and the Toronto Commercial Arbitration Society. In 2017, Robin founded the law firm Dodokin Law & Conflict Resolution, offering legal services and conflict resolution services including mediation and arbitration. Prior to that she was a partner at a mid-size Toronto law firm. Robin has been appointed to arbitrate and mediate family business disputes, commercial disputes, shareholder disputes, and business and employment disputes. Her conflict resolution expertise encompasses commercial, contract, business, insolvency, real estate and business issues disputes. Robin is passionate about relationship preservation and dispute avoidance work through facilitation and mediation when possible and understands that in some circumstances the parties require arbitration or litigation. Robin is also a co-editor of “Arbitration and Business Cases,” which summarizes important arbitration and business cases. Robin can be reached at Dodokin Law & Conflict Resolution, robin@dodokinlaw.com or at Linkedin.com/in/robindodokin.

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