In drawing your shareholders’ agreement in a family business, you should consider the relationship you are trying to build and sustain between your shareholders.
And how that relationship will support your family business succession goals. In this respect, regard should be had to the areas where conflict may arise, along with the creation of mechanisms to minimise the possibility of such conflict arising.
Active Knowledge Question:
What type of relationship do you want to exist between the shareholders of your family business? Describe the key traits of that relationship.
Conflict can readily arise between family members and – if they are all shareholders of the family business – that conflict can quickly flow over and impact the business’s performance and value.
The creation of a shareholders’ agreement can go a long way in regulating their conduct and providing a clear pathway to resolve any conflict.
These are the common areas of conflict, which your shareholders’ agreement should address. I would recommend that you seek legal advice and not draw the agreement by yourself. Consider:
- The Board
- How are directors appointed, removed, and remunerated?
- Are there independent directors, including the chairperson, and how are they appointed?
- What decisions must be referred to shareholders and what delegated authorities is the board empowered to make?
- Frequency of directors’ and shareholders’ meetings and the rules around the forming of a quorum at those meetings?
- Family Members
- What employment opportunities exist for family members? How will their salaries, bonuses, and benefits be determined? What performance assessments are they subject to?
- How are promotions determined and under what circumstances may a family member be dismissed?
- What training is available to family members?
- Is there a recommended retirement age for family members?
- Shareholders
- Should an annual budget be prepared and approved by shareholders or may the board approve it?
- How often does a business plan need to be prepared and approved by shareholders?
- How is a dividend policy set and approved?
- What rights/restrictions do shareholders have in relation to the transfer or sale of their shares in the company?
- At what price can/must shares be transferred/sold?
- Can shares be used as security for debt by a shareholder?
- What is the mechanism for dispute resolution?
The above is not an exhaustive list and under each point, there are various options that may be chosen in crafting the rights and obligations of shareholders of your family business. In these areas, you must seek professional advice but your focus should be on creating behaviours that will underpin the growth and success of the family business.
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All the best in the success of your business,
Richard Shrapnel
