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Family Businesses Need Shareholder Agreements Too

1st December 2016 Christian Mancier, Gorvins

How a shareholders’ agreement is put in place to provide clarity amongst shareholders’ in regards to how the business operates and what happens in one of those doomsday scenarios.

Do I need a shareholder agreement for my family business?

When going into business with family, it can be easy to assume that any disputes that may occur can be handled easily and amicably, because ‘no matter what happens, we’re family’. Unfortunately disputes between family members are often the most acrimonious and difficult to resolve because they can always become more personal. 

So when it comes to arranging the various rights and obligations of shareholders within your family business, it can be easy to dismiss the need for a shareholder agreement. You may even feel a shareholders’ agreement implies a feeling of distrust towards certain family members, possibly creating tension and unsettling the balance of the business.

In fact, it does quite the opposite.

A shareholders’ agreement is put in place to establish a fair relationships within the business and provide clarity amongst shareholders’ in regards to how the business operates and what happens in one of those doomsday scenarios. It provides a structure for all shareholders to adhere to and as a result can solve a wide variety of potential disagreements before they have the opportunity to turn into bitter disputes.

Hopefully a shareholders’ agreement will sit in a desk draw and gather dust as the family members grow the business harmoniously through collective decision making processes, however, when things don’t go quite according to plan, it provides a written default position. 

What does a shareholder agreement involve?

To put it simply, a shareholders’ agreement will…

  • Deal with what happens on the death/incapacity of a shareholder
  • Address how disputes will be handled going forward
  • Set out what happens if a shareholder wants to transfer their shares and what transfers are permitted
  • Provide protection for minority shareholders and the overall business itself.

There is no set format for a shareholders’ agreement, it can be as short or long and as detailed as you deem necessary and will always need to be bespoke to your business based on the unique facts, circumstances and personalities applicable to your family business.

What problems can the absence of a shareholder agreement cause my family business?

You may not be surprised to find out that common problems in most family businesses stem from personal conflicts, the most common disputes we have observed are;

  • Tensions between older and younger generations
  • Outside family members attempting to interfere with the running of the business
  • Sibling rivalries regarding titles and pay
  • Family members using shares as a ‘weapon’ during disputes

How will a shareholders’ agreement help my business?

A shareholders’ agreement is essential, not just for the present day to day operation of the company but can also prove invaluable for the future.

The allocation and sale of shares can be a contentious issue in any business. Without clear regulations in regards to the exchange of shares, a family member is free to sell on a portion/all of their shares to a 3rd party, putting the family ownership of the business in jeopardy. Putting all sales of shares to a vote in your agreement, or including a mechanism where the shares have to be offered to the other shareholders first of all, prevents this from happening.

Minority shareholders within the family business (typically younger generations/extended family) typically have very little say in the running of the business, this frequently leads to internal conflict. With a shareholders’ agreement, combined with an appropriate employment contract or service agreement if they are also a director, you will have full control in outlining exactly what input each family member has in the day to day running of the company as well as any more major decisions.

As for the future, planning for succession and the sudden departure/death of a family member is a vital, albeit unpleasant scenario to consider. When this happens, arguments can often occur regarding distribution of shares and responsibilities, establishing a protocol for this scenario in your shareholder agreement, whilst mirroring those provisions within each shareholder’s’ will, can save you and your family a great deal of time and stress.

About the Author - For further advice on shareholders’ agreements and the benefits for your business, please get in touch with Christian Mancier, Corporate/Commercial Partner via christian.mancier@gorvins.com. If you prefer to give Christian a call you can do on 0343 507 5151

 

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