TUE 16TH OCT 2018

RSS:

Bringing the family business community together

A Shareholders Agreement...

23rd June 2015 Anthony Turner, Farrer & Co

An insight into the reasons why the introduction of a shareholders agreement could be beneficial to the family firm.

The owners of a family business may well ask: why should we enter into a shareholders' agreement?   Surely, this is an unnecessary step, at least for us? The business is running happily. There are no disputes.

This may well be true, but there are many good reasons for putting such an agreement in place, even (and one might even say particularly) in the context of a family business, where very often the number of shareholders grows as future generations are brought into the business.

The principal benefit of a shareholders’ agreement is that it will focus the minds of the family members on who is involved in the company, each person’s role and what rights and powers they have when compared to other family members who are not involved in the business. The agreement should put in place a fit-for-purpose framework for good business practice and, as a result, ensure and promote stability and continuity. It should also incentivise employees as their role (and that of the family) should be clear.  

If sensibly drafted, it is an empowering document, allowing all involved to concentrate on developing the business (these are difficult times after all) or, if not involved in the business on a day-to-day basis, to step back from the business confident that it is being properly run within defined parameters.  An agreement should also look to the future and consider key events - death of a key family member, marriage or divorce.

Your view may still be that there is simply no need for a shareholders' agreement.  (In this case, you may still like to read the article as a matter of academic interest.)  If however, having asked yourself these questions, there remains an element of uncertainty - both for the business as it now operates and for the future - then it may be worth giving the idea some further thought.

What should the agreement cover?

A shareholders' agreement is an agreement between the shareholders of a company (and usually the company itself) and aims to regulate the manner in which those shareholders exercise their rights as shareholders and in which the company is run.  Although there are a number of matters that are traditionally dealt with in a shareholders' agreement, there need not be any set format; the document need not be incredibly lengthy: it can be brief, even in the form of a letter.  However, it should be legally binding and it is not a family constitution.  

There are, however, some basic areas that a shareholders' agreement should address, including:

(i)to protect the shareholder base and to ensure that the business remains family owned (unless of course there is a conscious, collective decision to the contrary); this is a key element.  Should there be restrictions on selling shares? The answer is usually "yes" and therefore, with some exceptions, share transfers are often restricted, for example to other family members or to a family trust.  These provisions may also deal with what happens to the shares on death, mental incapacity or divorce.  There may be circumstances where a family member needs to sell their shares (for example to raise funds for personal reasons) and a mechanism might be put in place to allow this: it may be that other shareholders are offered the right to acquire the shares or the company buys back the shares (with the advantage that the funding comes from the company rather than the shareholders).  There are a wide range of options.

(ii)to define the business of the company, usually restricting the company to carrying on its current business.  A change to the nature of the business will need consent.

(iii)to impose controls (or guidance) on the manner in which the company is run, both at board level and at shareholder level.  These controls may be negative (i.e. restricting what can be done without shareholder consent) or positive (at its best setting out a road map for the running of the company, such as by annual agreed business plans).  The agreement may well seek to impose a level of corporate governance on the company, setting out the manner in which the board needs to engage with shareholders.  Cherry-picking themes from listed companies may be sensible, for example in requiring audit and remuneration committees.

(iv)to provide protections for minority shareholders or shareholders not involved in the  day-to-day running of the company (in addition to those basic protections given by company law).  Usually, there is a list of matters reserved for particular levels of decision making.  These levels may require the written approval of all of the shareholders or by a stated percentage of them, or by the board for certain decisions. The company’s business may be dissected with some decisions delegated to, for example, the board of a subsidiary company, but with more material decisions being escalated to the parent company board and then the shareholders.

(v)to provide for the composition of the board of directors.  Who has the right to appoint, and remove, a director?  Will senior employees sit on the board?

(vi)to address dividend policies: it is often helpful for there to be a clear dividend policy so that there is some understanding on behalf of the family members as to what they can expect out of the company by way of dividends (profits) in each year. There may also be an agreement on other permitted payments such as salary.

(vii)to provide for a process for resolving disputes.  This may be by mediation, arbitration, litigation, forced sales of shares or a combination. Provision for this within the shareholders' agreement can potentially save considerable cost. An important element will be confidentiality and ensuring that disputes are kept private. 

A shareholders’ agreement exists in parallel with the articles of association, the constitution of the company.  The principal advantage of a shareholders’ agreement, unlike the Articles, is that it is a confidential document and as a general rule does not need to be filed at Companies House.  As such, private, family matters can be included in the shareholders' agreement.

A shareholders’ agreement may be between all of the shareholders but it is also possible for an agreement to be entered into between some of the shareholders regulating the manner in which, as between themselves, they will be bound.  

The shareholders’ agreement therefore avoids conflict, sets out an agreed road map as to how the company must be run and gives certainty to family members.  This is undoubtedly (even if it is never formally referred to) a benefit, at least to focus the mind of the family on how they want the business to be run (and who should be involved) and then to implement that decision by clear and defined rules.

What else should we do?

A shareholders' agreement is one part of the equation.  Ideally, it would form part of a wider family discussion about involvement in the family business.  

The process may include a wider review of the engagement of the family with the business, and a discussion on how the next generation will be involved in the business and what training they will need.

Equally, this process might include a review of the way that the family (as directors and shareholders) interact with the non-family directors and employees.  How should they be empowered or incentivised to run the business (for the benefit of the family)?  Will the board be an oversight board or actively involved in the running of the company?

The starting point therefore should be a look at the business and the family, as they are today but also with an eye to the future.  At the very least this should prompt a discussion which can then inform the extent of any review and documentation that might be needed. 

About the Author - Anthony Turner is a partner at Farrer & Co. If you require further information on anything covered in this briefing please contact Anthony Turner (anthony.turner@farrer.co.uk) or visit their website.

 

Tags

Sign up to our newsletter for email alerts

Supporting Links

N/A

Assets

N/A
comments powered by Disqus