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How to protect against litigation

Increasingly, family businesses are facing a rise in litigation and a greater propensity for them to be viewed as celebrities, open to attack from the mass media, unscrupulous advisers and other hostile parties. This is a real threat, and one that must be addressed if businesses are to be effectively passed down the generations.

Whilst a strategy for public relations and litigation are regarded as essential by most successful multinational corporate organisations, family businesses frequently neglect to establish similar functions for their own specific needs.

This has particularly been the case over the last few years with increased economic and commercial pressure on families and their businesses. Financial constraints have tightened, covenants have been broken and some business relationships have been exposed as fragile.

At the same time, media interest in this growing 'new' wealth has increased – stories of yachts being impounded by customs or long standing business relationships going sour, which would have once been hidden in the business pages, now make front page news.

For privately owned companies and entrepreneurial individuals, business is often all about reputation. Reputation is hard to build but easy to destroy, so protecting it has become an issue of key importance. Ideally, a strategy should be created which focuses on proactively managing the family's affairs to avoid disputes and litigation before they arise.

So what can you do to future-proof your family business?

First, you must assess your reputational risk by looking for weaknesses both in business operations and in the interaction you have with the media and other interested parties. This may include examining past and present contentious business and employee relationships that could result in litigation in the future.

Ideally, you should look to create a centralised decision-making process that has clear communication channels with advisers in order to deal with issues as early as possible. Potential risks should be ring fenced or closed down, or if this is not possible, a strategy created to deal with litigation before it is initialised. This should include a formal agreement on the use, circulation and protection of sensitive documents to comply with confidentiality, copyright, data protection obligations.

You should then develop a 'crisis management strategy' and identify the key messages that you want to get across to the market and to key opinion formers. You should know the best way to communicate these messages for any given scenario and ensure that market and competitor developments that may affect family interests are monitored.

In an era of increased regulation and compliance it is also important that key stakeholders and employees understand the risks of not getting the business operations right. You need to ask who has sufficient authority and knowledge of the business to respond to enquiries from the press or regulators on the business's behalf. Very often mistakes are made at the beginning of a 'crisis' when people are caught unawares.

Putting these measures in place to safeguard against disputes becoming litigious will always be less time consuming and expensive than resolving disputes ad-hoc. Indeed, in a world where personal and business lives stretch across the globe, up front planning for dealing with issues that may originate in one country but quickly spread across others will pay dividends.

Evidence has shown that the cost of putting a multi jurisdictional plan in place can be a tiny fraction of the cost of trying to deal with an out of control problem on the other side of the globe.

Coupled with a robust family governance structure, these strategies will help to shield the family from common internal challenges as well as unnecessary interference and stress from third parties.

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