Definitely mayhem: Oasis accounts lay bare problems of family business fall-out says law firm

   

A leading law firm says the recent filing of accounts by Manchester rock band Oasis ‘lay bare’ the dangers of family run businesses falling out and the vital importance of setting up a ‘family business constitution’.

Mace & Jones family business unit partner Ian Hodgkinson said too many family firms fail to properly protect themselves from inevitable disagreements and tensions, leaving a complex web of governance, finance and legal problems to resolve.

The Gallaghers’ spectacular bust up which saw the group disband in August last year has left the brothers with serious headaches as they remain co-directors of several companies relating to the band. This includes Noel and Liam each owning 40pc of their record label Big Brother Recordings which manages their back catalogue and is due to release a retrospective album this year. The label is also likely to release Noel Gallagher’s solo material. Liam meanwhile plans to continue Oasis without Noel and could also use the label to release material if he can get permission from Noel to use the name.

What happens to a business when family relationships go sour

“The rock ‘n’ roll world of Oasis may seem detached from day to day businesses but in reality Oasis is a family run business concern with the brothers acting as directors of a number of related firms,” he said. “Noel says he left Oasis because he could no longer work with Liam. And ultimately it is the case that for many family firms formerly close relationships can and do go sour as a result of the tensions involved in running a business.

Maybe you disagree over the direction the business is going in, or with bringing in a nephew or niece who is not up to the job, or may be your relations’ commitment does not meet yours or vice versa. But as Liam and Noel are now finding out if you are the most powerful directors in your companies, and you want them to continue after you have fallen out, it does become much, much harder.

You need to have a good working relationship so strong decisions can be made. However, if family members find it hard to talk to one another the firm can fast become a legal quagmire. In Oasis’ case the brothers careers and future earnings are closely tied into their companies so they do need to work together.

Although the legal agreements are not public it would seem Liam is in a difficult position because he wants to use the Oasis brand name which Noel will have a controlling interest in. But equally if Noel chooses to be difficult over Liam’s wishes Liam can do exactly the same back which leaves both brothers potentially in career stalemate.”

Setting up a constitution

Mr Hodgkinson said an option for the Gallaghers or any family firm operating a limited company is to set up a constitution which can resolve existing and potential problems.

“It is important to prevent conflict where ever you can,” he said. “So the constitution can provide the family members with a road map of how to run their firm ironing out divisive issues. It can also set ground rules for the vitally important area of future generations involvement in the firm. This governance structure promotes coordination and mutual understanding amongst family members, as well as organises the relationships between family governance and corporate governance.

The choice of family governance processes will depend on the size of the business, the number of family members, and the degree of involvement of family members in the business.

“A family constitution should outline the vision and objectives of the family for the business. It should define the roles of family governance bodies, and their relationship with the board of directors. It should also state key family policies, e.g. relating to family members’ employment, transfer of shares, and CEO succession.

Family governance bodies – such as a family assembly and a family council – provide family members with a forum in which to discuss the affairs of the family and the family business, and assist the development of a coordinated family approach. The constitution further gives clear guidance on the formal governance structures of the company. The role of the board, and shareholder meetings must be fully understood by family members.”

Mr Hodgkinson said a constitution can help family firms survive to the third generation, a critically important consideration as so few do.

“Most family companies are unlisted enterprises,” he said. “Research shows that family businesses have a short lifespan beyond the generation of the founding-entrepreneur. Family businesses can improve their odds of survival by setting the right governance structures in place and by starting the educational process of the subsequent generations as soon as possible.

When the company is still under the control of the founding entrepreneur, few family governance issues may be apparent. However, over time and several generations, the family is likely to increase in size and complexity.

Family members may develop different preferences for the business. For example, a decision to reinvest profits in the company instead of distributing them as dividends may be supported by an owner manager but opposed by a retired family member who relies on dividends as a main source of income. A further problem for larger families is that members who work in the business have greater access to information than those whom are not directly involved in the business.

“In such circumstances, it becomes desirable to establish family governance structures that establish a level playing field for company information, promote discipline among family members, prevent potential conflicts, and ensure the continuity of the business.”

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