I’m running a family business – do I need a shareholders’ agreement?
Helping you when you’re faced with juggling the demands of the business with what’s best for your family…
SUCCESSFUL family business owners are not your average entrepreneurs. They are master problem-solvers who juggle the demands of what’s best for their business alongside what’s best for their family and each of its members.
As family businesses expand, this juggling act can become strenuous, particularly in instances where generational gaps lead to disputes, or when non-family members are hired into management roles.
Disagreement often arises out of lack of clarity; thus, adding definition to the company’s basic structures can be of great value. A shareholders’ agreement is a private, personalised document specifically designed to formalise the business relationship between two or more people who have a joint interest in a company.
To avoid later conflict, family business owners should seek legal advice at the beginning, or at any relevant stage of the company’s development. Even if the business has progressed well past the formation stage, it's never too late to get the necessary legal infrastructure in place.
Remember, the memorandum and articles of association of a business may not be enough to cover all the bases. A frequent provision to shareholders’ agreements outlines that terms of the shareholders’ agreement will be superior to those in the articles of association, should any conflict between the two arise.
A family affair
A shareholders’ agreement sets out the parameters of the business (which are agreed upon by the shareholders) in order to establish a fair relationship between the shareholders and to govern how the company is run. When it comes to family businesses in particular, agreed principles in the document work to align family values with corporate discipline.
Typical matters covered in a shareholders’ agreement include:
· restrictions on transference of shares, such as the selling of shares to a third party or ways in which shares may be gifted to children
· pertaining to specified matters, restrictions requiring the approval of all the shareholders or shareholders holding a minimum percentage of the voting shares (for example 75%)
· the entitlement of larger shareholders to appoint key management roles
· how shareholders are to receive the profits of the business, particularly wherein family members hold varying degrees of shares
· preference as to how additional finance will be raised
Should I consider individual contracts or a family charter?
In addition to the shareholders' agreement, establishing contracts for each family member, which detail specific responsibilities and expectations, may prevent later difficulties.
Additionally, you could consider a family charter. Not legally binding, charters are often used where some of the owners do not work in the business and where there are non-family members employed into management roles. This document is quite flexible, since parties to a charter may include family members who are not necessarily shareholders (for example the beneficiaries of a family trust).
Family charters can cover matters including: rules relating to the employment, remuneration and retirement of family members as employees; education and training for the next generation; the establishment of an enterprise fund that can help family members not working in the business to set up their own business ventures; a family code of conduct.
Sarah Kendell, Operations Director at The Financial Options Group, said: “Family businesses are the lifeblood of British commerce – they now turn over £1.4 trillion annually, and are growing at a faster rate than non-family businesses. It’s crucial that we ensure family businesses are equipped with everything needed for their ongoing success.
“Local SMEs who don’t think they have much in common with multi-national corporations may be surprised to learn that as family businesses they share many of the same challenges and advantages which complex familial relationships bring to the table. These can include everything from individuals wanting to take the business into a new direction or appoint new directors to how they will put a succession plan in place.”
Who will take the reins – as well as how and when – are major considerations for family businesses. However, a surprising number of business owners have not dedicated the necessary attention to succession, being occupied with the day-to-day running of business, or having reservations about giving up control.
Fact: In 2017, just 13 per cent of family business owners were found to have a robust, documented and communicated succession plan in place.
Despite this dismal statistic, succession planning can be a straightforward process enabling you to pass the torch whilst minimising discord within the family or causing interruption to the business.
Honest conversations about the desire to carry on the business, as well as any skills gaps which will need to be filled, will help you to begin forming a strategy. Ultimately, seeking timely legal advice from a qualified, impartial source is crucial – well before the company’s ageing leadership structure becomes its most substantial liability.
When it’s a family business, it’s so much more than just a company – it’s your family’s wellbeing now and in the future. We know how important juggling those many demands is to you and the members of your family. We’d be delighted to lend our expertise, advising you on how to lay the foundations for generations of future success.
If you would like to book a no-obligation meeting with one of our expert advisers, call us on 0161 764 9944 or email firstname.lastname@example.org. Keep up with the latest news and trends from the corporate law and financial advice sectors by following our social channels on Facebook, Twitter and LinkedIn.