October 29th, 2012 / Insight posted in

Conflict at the family firm

EM writes: We have a business run by three generations of our family. The directors are the grandfather and father who own all the shares; the son has a pivotal role within the business but doesn’t own any shares.

This year, the son and his friend set up a company using the friend’s home address and with the son holding a majority share. We expect him to stay with the family business in the short term and wish to make his responsibilities clear. However, there are no contracts of employment. What action would you recommend to help protect the firm’s interests?

There are a number of ways to ensure this new company does not compete with you, but you should discuss the matter with the son first, writes Jon Sutcliffe, partner at Kingston Smith LLP.

To have taken this route he must believe his efforts are not being rewarded or he is not comfortable with working arrangements. You could consider offering him target-based earnings, provide criteria under which he could receive shares in future or discuss what could change to make him more comfortable.

If this does not help, you could resort to more draconian measures. However, this is likely to consume a great deal of time and energy, cost money and leave all parties worse off. Regardless of the lack of an employment contract, the son has an absolute duty of care under common law to act in the best interests of his employer. Any involvement in a competing company would be in clear conflict of this interest. Where a conflict is not disclosed, an employer would typically follow disciplinary procedures.