Family Businesses

The Benefits of a Shareholders’ Agreement
Family Businesses
10th October, 2019

Family ties whether through blood or marriage are usually the reasons family business owners give for not having formal legal documentation to govern the relationships between themselves.

However, there is a big difference between being a member of a family and being a shareholder/director who own a business.

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. 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 e.g. divorce or leaving the business, 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 – what is the exit route for the owners?

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, succession and exit.

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.

The content of this Briefing is for general information only. If you would like to discuss any of the issues raised in this Briefing or any other business issues please contact Richard Murrall on 01462 419917 or email him at richardmurrall@pellys.co.uk.

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