Transfer of ownership is one of the triggering events for disputes. To have clarity on sale, transmission and transfer of business ownership among family members calls for a guiding principles. The same can be achieved through a Family Business Shareholder Agreement. A Family Shareholder Agreement is a legally binding document, which specifies the guiding principles for valuation formula for ownership stake, the rules for sale, transmission and transfer of ownership, the consideration for sale and the restrictive covenants for sale to outside parties. It also defines the voting rights of the shareholders. This gives clarity to all the family members about the future transfer of ownership and plan well in advance to provide for the expected changes in future.
It is essential to have the Family Business Shareholder Agreement in place as it protects the shareholders of a family business from avoidable conflict and disagreements and ensures continued success for the family business
A shareholder in a family business is someone who has ownership in the family business by way of holding an equity or preferential shares in case of a private limited or a public limited company or has a capital investment in a family owned partnership or LLP firm. As the owner, the members receive income by way of dividend or by way of withdrawal as the case maybe. The member also enjoys voting rights for various decisions that the organisation is required to take, as well as in appointing the key managerial employees to run the show. They have right to choose the Board of Directors, as well as right to nominate self for the position of Director. The owner is entitled to financial compensation though sale of the ownership stake. When there are multiple shareholders in a family business, it makes sense to have a shareholder agreement in place.
“Some binding legal agreements are necessary for defining how parties in the family business will do business together. Especially outlining the mediation process in case of a disputes is important, as is binding arbitration in the event of unsuccessful mediation. Such agreements work as a preventive mechanism. They rarely get used, since the family members know that there is a formal mechanism that will have binding on them; hence they tend to reach amicable solutions rather than exercising the option of mediation and arbitration.”
The purpose of family business shareholder agreement is to create a binding legal document that outlines how shareholders will contribute to the business and will work at all times with the best interest of the company in mind.
It generally constitutes following sections:
- Guiding Principles
- Shareholder Prerogatives and Responsibilities
- Decision Making
- Valuation principle for the shares
- Sale or Transfer or Transmission of Shares
- Resolution process in case of a deadlock
Learn to manage Disagreements
Disagreements are bound to happen in any business. Disagreements are not necessarily bad, on the contrary, disagreement gives you a different point of view to look at the situation which you may have missed. Rather than avoiding disagreements, which is like avoiding a counter view on the same issue, we need to learn to manage disagreements. The first thing we need is to accept that there can be a counter view point for the same issue which can be different from your point of view. Second thing is to learn how to table and address the disagreements, as it is one of the important skills all family members should learn. Don’t let a small conflict unattended for a long time, as they eventually lead to a major disruption within a family business as it may lead to strain relationships and ultimately demise of the business.
Disputes must be handled swiftly and fairly. A shareholder agreement can serve to address the dispute in a systematic way before a conflict gets out of hand. Shareholders are bound by the dispute resolution procedure specified in the shareholder agreement, which may call for mediation or arbitration. Once the family members are aware of the dispute resolution procedures, then there are very less chances for the disputes to end up in arbitration, rather there are higher chances of disputes getting resolved amicably.
If your family business does not have a shareholder agreement, now is the time to develop one.
The Importance of a Family Business Shareholder Agreement
Any family business that is desirous of lasting for generations without a shareholder agreement in place is destined for disagreements, conflicts and ultimately the split or demise of family business. When a Family Business Shareholder Agreement is enacted, the chances for shareholder discord are significantly reduced. A shareholder agreement needs to be customized for the individual business and should address the specific needs which are unique to family business.
Does Your Family Business Need Help?
With extensive hands on experience of assisting family businesses, we understand the wide variety of challenges that families face as they work together to build, grow and sustain a thriving family business generation after generation. Through orientation programs, one to one as well as common meetings, workshops, public talks, mentoring, coaching, Family retreats and private family business consulting services, we help family business owners chart their way through family business issues of all shapes and sizes.