Research regularly shows that many family businesses do not have in place formal arrangements regarding their relationships as owners and/or managers, whether in the form of a family charter, shareholders’ agreements or other bespoke constitutional documents.
There may be perfectly understandable reasons for that. Occupied with the task of building
and operating a successful business, it is not always easy to find the time and headspace to step back to review the structure of a business and plan for the future. Add in the challenges around family dynamics or a reluctance to engage with what may be perceived as a daunting legal process, it’s not surprising this often goes back into the difficult box.
Yet we see the problems that this can cause. Failing to deal matters can create commercial uncertainty and unwanted personal difficulties in years to come.
What is often overlooked is that the business is not starting with a blank sheet of paper.
A decision not to address these issues is a decision to accept the legal status quo. The difficulty with that approach is that individuals often do not understand the position they find themselves in. It is rarer still to discover that the current legal background is what everyone expects or wants it to be.
What rights do shareholders have to transfer their shares during lifetime and on death?
What happens to their shares if they leave the business?
If a dispute arises on a key
issue, who has the final say?
Does the business owner know the answers to these questions, or even know where to find them?
The answers can often be surprising. From a legal standpoint, provisions in the company’s Articles of Association and any Wills or shareholders’ agreements that have already been put in place may include answers to some of these questions.
Are those documents accurate and up to date?
When did anyone last review them?
The position on death is often overlooked. People generally understand that they should have a Will but may be unaware that this may be overridden by the company’s constitutional documents. We often see problems when a key shareholder dies because there is either no suitable provision in their Will or what’s written in there is at odds with what the company documents say.
Conversely, a bequest may be allowed which the surviving shareholders find unacceptable.
In the most severe cases, this can result in unnecessary conflict and difficult and expensive litigation.
We urge family businesses to have honest and open conversations about their individual and collective aspirations for the future. That should be grounded in a proper appreciation of ‘where we now?’ which may well prompt renewed impetus to have the right structures
in place.
A good starting place is often to understand the existing arrangements and whether they are fit for purpose. Clients often look at us blankly when we ask them about their Articles, but if problems arise within the company, this will often be a first port of call. That shouldn’t be the first time the family understands the rules which apply to them.
If this isn’t reviewed regularly, default company rules may be some distance away from what is needed to meet the short and long term objectives of the owners.
The good news is that there is considerable flexibility to create a framework which reflects personal, family and business aspirations. There is no ‘one size fits all’ but by talking through key scenarios, we can frame tailored solutions. The exercise may unearth and prompt wider discussions that create renewed clarity for the business and everyone involved.
What is certain is that it’s much easier to create a constructive consensus by anticipating events rather than leaving it to chance.
About the author - Paul Hunt is a Partner and Head of Succession Planning at Higgs LLP.
Find out more here www.higgsllp.co.uk