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Women and Wealth: Sale by coercion

The positive aspects of the family business ownership model have rightly been given more publicity recently as the failures inherent in the world's financial system have been exposed. Yet it is important families do not get carried away on a wave of self-congratulation – they can learn as much, if not more, from bad practice as from good.

There is a dark side to some business families, and one in particular warrants closer inspection in the current climate - the pressure placed on minority shareholders to part with their shares when they are not inclined to do so, often at a price that bears little resemblance to the value of the shares.

While this has always happened, it has started to show up more regularly. This timing is probably because the generation of founders who started their businesses post World War 2 are now in late adulthood, and find themselves having to finally decide the destiny of the shares controlling the family business.

Enforced selling involves emotional pressure being applied to shareholders who may be unwilling to sell. This often involves elderly sisters, aunts, mothers or daughters who may have been passive shareholders over the years and know relatively little about the business itself and even less about ownership and the rights and responsibilities thereof. Sadly, in relation to the faamily business, these women are often regarded as unenlightened baggage when in reality their commitment, wisdom and perspective on the family and the business is highly enlightened yet under-appreciated.

Morality and ownership

One recent example (typical of many others) is a British company whose founder, a principled Quaker, established a business that, as it grew, engaged his four sons as sibling partners. In due course their sons became a cousins' consortium running the business. A culture became embedded in which the men ran the businesses. They had operational and ownership control as their executive roles qualified them to have possession of voting shares. The women of the family were "taken care of" through preference shares and trusts, and for three generations all went well and no one challenged this equilibrium.

The entry of the fourth generation brought some novel challenges because there were women who were willing and able to work in the business. This forced the board, comprising of third- and fourth-generation active owners, to address the historical gender bias that gave the male line control and ownership of the voting shares. To make the problem go away, it was decided to prune the family tree and persuade third-generation sisters to part with their shares "in the interest of simplifying the business and ensuring family control for generations to come".

Nobody argued with the logic, but nothing happened for two years until the stakes were raised by the intention to change the Articles of Association at the next AGM, effectively forcing the sale of the sisters' shares. Rather than risk an embarrassing AGM, the brothers put coercive pressure on their sisters and, rather than risk an embarrassing AGM, they begrudgingly complied.

In 2006, the fourth-generation male cousins who each controlled their own operating companies within the group were poised to take over the board, and further enforced selling is still being considered.

One fourth-generation member commented at a recent meeting that his aunt had been quite distressed when she recalled selling her shares to her brother, saying she had no choice and that if she had that time again she would certainly not sell them.

This blew open a debate on the morality of the ownership culture and a discussion between one "concerned" sub group who disliked this part of who they had become and were motivated to change it, and an "ambivalent" sub group who felt that while it may not be ideal, it had served the system well, and so were motivated to resist changing it.

Coercive behaviour

What would motivate a family member to put significant pressure on a sibling to sell or transfer their shares? Looked at from the other angle, what would motivate passive shareholders to part with their shares under agreeable circumstances, eliminating the need for coercion?

In some cases, there may be high anxieties or perhaps pathologies at work driving someone to act out with revenge, envy or anger on another family member who is not emotionally robust enough to defend themselves. Feelings of revenge or envy will predictably be re-focused into the family domain where pressure is brought through the formation of alliances with other family members so that the minority owner feels isolated. At this stage, it becomes a battle of the egos, and it is far better to decide sooner than later whether to engage or not engage in this type of battle.

If the person on the receiving end feels fear, vulnerability or intimidation, one option is to engage support by creating some distance between oneself and the aggressor, to make it less personal at least in one domain. A nominee could attend to the business side of the relationship, for example, bringing some neutrality into matters affecting the business.

The other options at this point are to sell out and invest emotional energy in coming to terms with the loss, or to hunker down for the long haul, surviving the emotional onslaught by taking an informed stance and trying not to be too reactive to pressure in whatever form it takes. 

In most cases, something is indeed being acted out, but it may not always be malevolent. This is because the forces at work are ultimately natural ones, which drive people to act in what are to them logical ways. Of course, they appear to be pathological, and indeed they are very real for the recipient on the emotional level. So it is important to come to terms with what factors ultimately motivate coercive behaviour, and deal with them on each level with the resources needed for each.

The interests of family, business and owners as a unified collective can become out of synch and strained when any of the following three things happen:

The number of members increases beyond its coping threshold.

The quality of democracy in the system is lacking.

The members of the system are not sufficiently emotionally connected.

In other words, the family glue has become diluted as people have drifted apart, leaving a small but powerful group of owners/executives whose intense focus is on governing the business using their preferred, usually idiosynchratic, methods of governance.

In response, this group then rationalises the task and sets out on its mission to prune the tree. How members of the group go about this may be logically driven and therefore felt to be pure in intent, although it may be contaminated to a greater or lesser extend by a deeper, pathological drive. For those on the receiving end of the group's actions, from a transactional perspective, a decision has to be made whether to resist or yield to the pressure; and from the emotional perspective either can be devastating.

Lessons to learn

One 56-year-old woman who held a minority of voting shares in a large, family-owned UK retail business found herself under immense pressure from her elder brother and only surviving sibling to sell her shares to him. Her first response was to be offended. Within three months a board reorganisation had been implemented with her being voted off the board, closing the door to her source of information on how the business was doing. Feeling isolated and threatened, she confided in her 89-year-old mother, seeking and gaining her support.

At this point, her brother went to see their mother and explained that he was trying to attract his eldest son, potentially an able successor, to join the business and become the next leader, ensuring family control for the next generation at least. The son, an accomplished businessman in his own right, was considering the opportunity based on the facts and its merits, and he had made it clear that it would not be feasible unless he had the majority controlling ownership of the voting shares in the business. The mother was then persuaded that what mattered most of all was the longevity of the business for the good of the family in the long run, and she began to put pressure on her daughter to comply. Now isolated from her mother as well as the board, she became clinically depressed and unable to function in her normal life.

Where is the solution in a situation like this? The woman in question took two specific pieces of advice. One was to be referred to someone from outside the system who could be neutral – in this case a therapist who understood the complex psychodynamics at work in the family system and who could, from this knowledge base, provide a supportive "container" for her whilst the situation evolved, reached its peak and came to its conclusion and whilst she went through the process of recovery from the depression. The other advice the woman took was to undertake to personally learn more about ownership – its legal dimensions and its emotional dimensions.

Two lessons emerged for her. When she began to realise that the dilution forces were evolutionary in origin and therefore ultimately unstoppable (families simply grow bigger: shares and the power that goes with them dilute as they get divided up) - she began to feel less inclined to fight. This change in stance let in the chink of light she was looking for. She was no longer maintaining a permanent state of being 'braced for battle', and this allowed her to think more clearly and strategically about the choices she had and the consequences of each option. The forces of dilution would never go away, and she did not wield sufficient legal power to defend her minority through the existing controls of governance in the family business – it was a dead end. 

The second lesson was that she realised the shares were symbolic of her late and much revered father, who had promised her these shares and whom she said had never gone back on anything he ever promised her. Parting with the shares was forcing her to complete the grief cycle and part with her father. It took two years to work through the feelings associated with this. She became sympathetic to her brother's motives, but not to his methods.

From her brother's perspective, she was threatening the future of the business. The mother found herself in a pernicious triangle, trying to maintain strained relationships with both her children at such a late stage in life. When, one day, she temporarily teetered in the direction of supporting her daughter's stance, within two hours her son was there at his mother's apartment, doing far more forcefully what he felt was needed to ensure his son the control of the business.

When his sister finally capitulated, she did so with a strong logical understanding of the forces driving her into this position, as well as strong feelings of loss, not just of her father, but also the loss of part of the essence of her family bond, because everyone's defences were up and so there was little genuine empathy around for her state of bereavement.

An honourable exchange

Logic and the forces of dilution, though, cannot explain why some minority shareholders who are coerced into selling do so with no formal share valuation, and come out of the whole experience much less worse off than they could or should have been. The most obvious example is the extent to which the protagonists establish an honourable exchange – ie, a transparent and fair process from both perspectives.

The sad cases above involved a deal cooked up in someone's living room, and the use of coercion to avoid potentially nasty discussions in relatives' homes, at AGMs or on the business premises, plus the unwanted emotional residue at future family celebrations or family business events.

A healthier solution would be to start with a basic education for all on what the shareholding structure is and what it means to those involved. A third party valuation is required to take out the element of conflict of interest, and it may require the buyer agreeing to phased payments if the business has not made provisions for buying back shares.

If minority ownership is desired or unavoidable, a system of governance protecting minority owners, bolstered by a shareholders' agreement which guarantees an honourable exchange is the order of the day.

If minority ownership is not desired then a parting of ways will inevitably happen. To avoid enforced selling in this instance, both parties should also strive for an honourable exchange. For this to happen, the family must make the time to meet, discuss the ownership issues and options openly and respectfully, building a deeper sense of trust that forms the foundation for a fair process and the resulting decisions that are taken. They can then go their separate ways, and use whatever forms of support are available to come to terms with the consequences.

Although it may cost more time and money than the controlling owners may care to spend, it is a win-win situation in the end because the business can go forward with a group who share the same philosophy about ownership and business longevity, and keep the family business ownership model in the headlines for all the right reasons. 

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