Benefits Of A Shareholders Agreement
19th October 2016 Adam Jones, Birketts LLP
A shareholders’ agreement can promote discussions on key areas that can get overlooked due to the family dynamic.
Benefits of a shareholders’ agreement
Blood ties. Family relationships. Being next of kin. These are the reasons people give for not having formal legal documentation to govern the relationships between family business owners. That is admirable sentiment, because we all hope for petty differences to be put aside and for a family to act for the greater good. However, deciding to have a binding shareholders’ agreement is about more than dealing with that friction. There is a difference between being a member of a family, and being a member of a group who own a business. These overlap, but focus should be on other benefits.
A shareholders’ agreement can promote discussions on key areas that can get overlooked due to the family dynamic. Strategy, and its implementation, can be made more concrete within a shareholders’ agreement. It can deal with specific roles for specific people, bringing focus onto the quest for superior performance or new opportunities. Naturally this can include such new projects being brought to the family – possibly to a formalised Family Council under a separate charter – for consideration and approval, providing a framework for that focus.
Linked to this is leadership, without which any business can flounder. Many family owned businesses are led by the oldest or longest-serving family member. That may be appropriate, but one needs to explore if that should be a chairpersonship role with executive management going to those demonstrating the skill and ambition to competently grow the business. Even if the status quo Is maintained, valuable clarity and consensus will now exist on who is doing what and for whom.
Key concerns for a family owned business include the pursuit of the bloodline and whether spouses should be involved, what balance to strike between participating and non-participating family members, and whether the attitude of the owners is to obtain value or act as custodians. All of these things, and more, can be usefully addressed in a shareholders’ agreement (coupled with appropriate articles of association) because these documents allow the parties to draft the “rules of involvement”.
It could include requirements to transfer shares in certain circumstances, or statements of best practice addressing recruitment to key roles based around skill set and not surname, bring important focus to policies on release of income to the owners, and also consider that big question for the future – shall we sell?
As generations pass and the numbers of people involved grows, informal conversations are rarely sufficient. Family meetings can be useful, but formalising this can bring comfort to the wider family, as they can see a route to gaining important information, with accountability of those remunerated by the business to run it, lead it and grow it.
There can be agreed guidelines around entry into the business, salary levels, rights to equity, but also (and this is no less important) around less tangible aspects like the culture of the business, its attitude towards its local community, its charitable intentions. Any forum that allows the owners of a family owned business to sometimes readdress why they are in business together at all is enormously helpful.
It will help minimise the effect of family circumstances on the business, so that events such as death, marriage, divorce, and even good old traditional bust-ups, do not immediately impact the business, which can move along more serenely beneath those upheavals.
When a business is seeking debt funding or large commercial relationships, having a formal shareholders’ agreement can demonstrate stability where otherwise there might be concerns about family divisions causing issues for the business. It offers breathing space to everyone, as they will have signed up to it, agreed that their rights are protected, and will understand the guidelines for the future, benefitting the family business and all of those involved.
About the Author - Adam Jones is a Partner and the Head of Birketts' Family Owned Business Team and can be contacted on 01245 211332 or by email at firstname.lastname@example.org