Relatives and business is a fairly broad topic. Going into business with a partner who is also a relative has its advantages and disadvantages. As a rule, in a family business everything always starts off quite rosy. There's no need to get used to one another or observe any formalities. Later on, however, as experience shows, everything turns out to be far more complicated than an ordinary working relationship with outsiders hired for a position. A few months go by, and problems start to surface. It's not for nothing that most business guides insist you shouldn't go into business with relatives. Even so, not many people are aware of this rule.
The main argument for business owners who bring relatives on board as partners, managers, or heads of departments is trust in them. In Russia in general, trust in business is valued very highly, often even more than competence and professionalism. However, when conflicts arise, relatives and friends turn out to be not so different from staff hired from outside. And it can often lead to even more negative consequences for the company, such as revenge or confidential information being taken outside the company. At the same time, relatives' motivation for quality work is usually lower than that of hired staff, while their level of demands is considerably higher. They often abuse the trust placed in them and allow themselves more than is permitted, feeling that they will get away with it.
Important to know
A dispute between co-owners of a company is best resolved through a clearly drafted articles of association and partnership agreement put in place before any conflict arises — then the court only has to apply the rules the partners already agreed on.
Veniamin (name changed) had been in business for 15 years already, having opened his first company in Germany at the age of 25. By the age of 35, Veniamin owned two companies of his own and was running them fairly successfully and profitably. Trading in real estate and providing car-repair services were the main areas of activity of his companies. The companies grew, and at a certain point he, as the business owner, could no longer personally keep up with overseeing every department. He needed a deputy to whom he could delegate part of a manager's functions. As a rule, it is precisely in such situations that friends or relatives appear in a company, and the businessman pins his hopes on their help.
Veniamin had many relatives in Germany, and among them, the one with business experience was the husband of his own niece, Konstantin (name changed). Konstantin also had his own small business — a car-repair shop offering vehicle maintenance and repair services. In addition, together with his brother and one other acquaintance, he was a co-founder of another company — a paintwork workshop called "Lack-Zentrum."
At a certain point, the two relatives, Veniamin and Konstantin, decided to merge their car-repair businesses into one large company and grow the business together. To that end, Veniamin bought out Konstantin's company, as well as "Lack-Zentrum." When Veniamin acquired the two companies mentioned above, the relatives agreed that the purchase would be formalised and carried out on the terms of loan agreements with the owners of these companies. Although each company territorially retained its own location, on paper, following the merger, it had already become a group under the name "Novax-Company." The two brothers, Konstantin and Alexei, went to work for "Novax-Company." Konstantin took on the position of managing director, though his range of duties and powers was not limited to that role.
As a businessman, at the time Veniamin saw only the positive sides of such a merger. First, he would gain support in the business in the person of a relative he could truly rely on; second, the merger of the companies would remove the element of competition between the two firms in the car-services sector; and third, profits would increase. And the results of this decision were not long in coming. They were, however, far from pleasant, and certainly did not match Veniamin's expectations.
The relationship between Veniamin and Konstantin had always been very good. During their infrequent family gatherings, among close relatives, Konstantin had shown himself to be a sociable, business-minded and, most importantly, reliable person. A few months on, however, Veniamin's opinion of him changed. In the working environment, it turned out, he not only had no idea how to talk to customers, but also considered his contribution to the joint business to be far greater than it actually was. He often shirked work, believing he had the right to decide for himself what to do and when it suited him. He frequently "pulled" money out of the business for his own personal needs and, as it later emerged, entered into various murky deals that bypassed the till, all while keeping Veniamin in the dark. Ultimately, the "Novax-Company" group survived only because Veniamin kept putting his own personal funds into the operation. He had to keep propping up the brothers' absorbed companies. And so, instead of the expected profit, all that arose were losses. Konstantin's divorce from Veniamin's niece made the situation even worse. Konstantin simply became unbearable, constantly picking fights and provoking everyone.
Unsurprisingly, after a few months of working together, Veniamin had had enough of it all and decided to end the business relationship. Without dragging things out any further, he proposed that Konstantin take his companies back and sign an amicable settlement under which neither side would have any financial claims or demands against the other. And that is what they did. Everything soon returned to its usual course and began to settle down — but only until Veniamin found out that Konstantin had filed a lawsuit against his company.
The substance of the claim was that "Novax-Company" owed his car-repair business, as well as "Lack-Zentrum," around 30,000 euros under the loan agreements originally concluded when Veniamin bought the two companies. Konstantin claimed that, when the agreement waiving mutual financial claims was signed, his life and health had been threatened, and that the agreement was therefore invalid. Veniamin, he claimed, was directly linked to these threats, since they had allegedly been carried out on his instructions. The statement of claim laid out this story, and the actual moment the agreement was signed, in vivid detail. According to Konstantin's version of events, a knife had been held to his throat, he had been held by the hair and insulted. The knife, he said, had been held by a "Novax-Company" employee named Magomed (name changed), whom he claimed to barely know personally.
Under German law, where a transaction is concluded under a threat to life or health, one year is allowed for challenging that transaction. That one-year period begins to run from the moment the threatening situation ceases to exist. In this case, the claimant went to court three years later, explaining that the threat to his life had persisted the whole time, since he had been under constant surveillance. The reason he was only now taking the matter to court, he said, was that he had been admitted to a witness-protection programme. His whereabouts had been anonymised, he was under police protection, and he moved around only with a police escort. Only then, he said, did the threats and the fear for his safety disappear, which was why he was now filing the claim.
Veniamin was shocked — he had never expected this turn of events — and so, for his part, he immediately came to our law firm to have us represent his interests in court. When reviewing the case, our attorney was indeed struck by just how tangled the paperwork behind the companies' merger was. A great many different agreements had been concluded to spread the financial burden connected with the purchase of these companies. That, however, was not the subject of the dispute. In fact, the settlement agreement had been signed, both sides had mutually waived any financial claims against one another, and Konstantin and his brother had received their companies back. So what needed to be proven in this case, above all, was that there had been no threat of the kind Konstantin referred to, meaning the agreement was valid and the claimant's demands were groundless.
When drafting the counter-argument, our attorney drew the court's attention to the fact that the very "Novax-Company" employee, Magomed, who had allegedly threatened him with a knife, was in fact a friend of the claimant. Magomed had previously, even before the companies merged into the group, worked at the car-repair shop owned by the claimant. Their relationship was not purely professional but also of a close personal nature. Magomed was a regular visitor to Konstantin's home and had stayed there overnight on more than one occasion, which the claimant's ex-wife could also confirm. It hardly needs mentioning that it was Konstantin himself who had hired Magomed and signed his employment contract, not to mention finding jobs for numerous other relatives of his. In addition, there was also witness testimony confirming that the two of them kept in touch even after the agreement was signed. Our client, unlike the claimant, barely knew Magomed and had nothing in common with him beyond their working relationship.
The attorney also pointed out that, during his time working at the group, Konstantin had misappropriated a total of around 40,000 euros from the company's budget, repeatedly taking money from the till without ever declaring it in the accounts. Our client had not filed a report against him with the public prosecutor's office, out of consideration for their family ties. It was known, however, that a criminal investigation was under way against Konstantin over money laundering, drug distribution, and several other incidents linked to other cases. Accordingly, the argument that the claimant had been admitted to the witness-protection programme specifically because of a threat allegedly coming from our client was open to serious doubt. It followed that the limitation period for challenging the agreement had long since expired.
In support of this, the attorney relied on the testimony of several company employees and of Konstantin's ex-wife. The key witness, however — the one who had actually been present when the agreement was signed — still had to be tracked down. Our attorney put in an enormous amount of work to find and contact him. The issue was that this employee had not worked as an accountant at our client's company for a year already. For a long time afterwards, he flatly refused to get in touch with us, let alone give testimony in the case, fearing he would get dragged into an unpleasant affair. Our firm's attorney, however, who has extensive experience dealing with witnesses, managed to persuade him, and he appeared in court on the day of the hearing. In his testimony, the witness also confirmed the close relationship between Konstantin and Magomed both before and after the agreement was signed, and stated that, at the moment of signing, although Magomed had been present in the room, no pressure whatsoever had been exerted on the claimant, let alone any threat to his life or health. He had not seen any knife either. It was precisely this witness's testimony that proved decisive for the court in reaching its decision. As a result, having heard all the parties and the witnesses called, the court ruled in favour of our client and dismissed the claimant's demands.
This story is a good illustration of the fact that having family ties is not, in itself, a reason to hire relatives, let alone go into business with them. There are, of course, positive examples too. But they are the exception rather than the rule. If you do decide to go ahead with a family business, the best approach is to protect yourself against such situations from the outset by setting clear rules for relatives working in the business — their rights, powers and duties — and by describing the procedures for entering and exiting the business. Such a document can go a long way towards avoiding unpleasant situations further down the line.
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THE LAW FIRM REPRESENTS CLIENTS' INTERESTS THROUGHOUT GERMANY
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