Family Businesses – the need for a Shareholders’ Agreement

Traditionally, many first generation owners of family managed businesses have run their enterprise without any difficulty; absent any problems arising they see no benefit in having a Shareholders Agreement in place.

While a Shareholders’ Agreement is not a legal requirement, they are a useful document for any incorporated family businesses insofar that they can regulate i) the relationship between the shareholders ii) the management of the company ownership of shares and iii) protection of the shareholders.

Unlike Articles of Association, any Shareholders Agreement is a private document reflecting the agreements between the shareholders but will not need to be registered at Companies House.

In summary, a Shareholders’ Agreement can provide provisions that will govern:-

Dividend Policy

Such policies will vary from agreement to agreement and can be tailored to suit the needs and circumstances of the business. Such provisions are recorded to ensure that the family members agree on how profits will be paid from the business to each of the shareholders.

Issuing and Transferring Shares

A Shareholders Agreement can provide mechanisms that govern events, such as, i) when one shareholder wishes to sell their shares ii) upon sale, whether there is a right for existing shareholders to purchase those shares.

There can also be mechanisms put in place to cover events such as the unexpected death of shareholders, which can put positive obligations on the business to buy back such shares from the deceased’s estate. This may be particularly important if there is a desire to avoid unconnected 3rd parties becoming involved in the family business.

Provisions for Protecting Minority Shareholders

The agreement can provide protection for minority shareholders by reserving certain decisions, for example, the issue of further shares, which can be only made with the unanimous consent of all shareholders. The agreement may also contain certain provisions that can protect the ability of minority shareholders, in the event of majority shareholders attempting to sell their shares.

Conclusion

The above is not an exhaustive list of available clauses Shareholders’ Agreements, but a flavour of some which we recommend every family business should consider. The Agreement can clearly set out the responsibilities and structure of those involved within the family business to avoid potential family disputes and to ensure that everyone is working together for the benefit the business as a whole.

The drafting of Shareholders Agreements are complex and often require careful consideration. It is vital that family businesses get specialist advice to ensure that such agreements are tailored to the family business’s needs.