Do family businesses need shareholder agreements?

There are many benefits to the process of creating a shareholders agreement; it creates an opportunity to have those difficult conversations that otherwise remain unspoken and brings certainty and peace of mind by having it all written down. However, in the context of a family relationship, is it just a little bit too legal and formal? After all the ties that bind are strong enough to see families through the toughest of challenges and maybe suggesting to a married couple that they might need to contemplate, what will happen if the relationship dies is just too difficult and unnecessary.

If family members are going to share the management and ownership of a business, consider the forces that might pull away from the family bonds.

Every family member working in a business will be expected to fulfil the duties and responsibilities that have been assigned to them. This will mean carrying out the job functions and behaving as a responsible member of staff or leader of the business like any other staff member or director. It is not enough that the individual is a family member and failure to behave in the way expected can often create resentment for other staff and other family members.

Family members who are given shares in the family company or a seat on the board will expect the rewards that go with ownership, to partake in the successes of the business, such as profit distributions and capital events such as a sale of the company’s shares. In addition, they will want freedom to express their views and to have a say in the future direction and running of the business. To a greater or lesser extent where succession to the next generation is at play, the existing family owners will expect the incoming family members to demonstrate that they deserve and have earned these rewards and freedoms. Rarely is it sufficient that the family bond is all that is required.

How can a shareholders agreement help?

A shareholders agreement will help define the rules between family members when it comes to business and with supplementary documents. In particular, employment contracts and articles of association make clear what is expected of family members when in the workplace, what rewards are available now and how those might change over the future, and what say the family member will have in the running and future direction of the business. This is not to say that the family bond is broken and, in fact, clarity in these matters will assist with communication and will reduce misunderstandings.

What if there is a will in place?

A will is a statement (testament) made unilaterally by the testator. It can be changed at any time. A shareholders agreement is an agreement between two or more shareholders and cannot be changed except with the agreement of all the parties (unless the agreement itself provides a lower threshold).

It advisable to express your wishes in a will for a number of reasons, but if you are a family member working in a business and expecting to inherit, the position is not settled until that family member dies and the final will is revealed. The shareholders agreement treats the family member not as a would-be legatee, but as a party to the agreement with the rights under that agreement. These could include the right to inherit shares but if there is an unexpected change in the will, a right to buy those shares.

Shareholder agreements and divorce

Many married couples share ownership for non-business reasons, for instance, to make the most of personal tax allowances or through a wish to involve each other in projects which may benefit or be critical to the future of the family. If the worst happens and the courts are asked to consider the financial arrangements on divorce, they will seek to give effect to any shareholders agreement as part of an overall review of the overall assets and income of the couple. In other words, it does not mean that the painful process of assessing and addressing the means and needs of each spouse will be avoided, but it may help secure the future of the business by avoiding it becoming entangled in the financial separation.

Are shareholders agreements the same as partnership agreements?

The same points above apply equally to partnership agreements or LLP agreements between partners or members of a general partnership or limited liability partnership.

We’re here to help

We specialise in supporting family business owners through the many and varied challenges they face, such as family dynamics, family investments, succession issues, inheritance tax and more. If you need guidance or support with shareholder agreements, or any other legal issue, then we can help.

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Contact: Jody Webb  jody.webb@shma.co.uk