How Family Business Can Avoid Family Feuds
Family businesses can be challenging to manage as the boundaries between personal and professional relationships become blurred. Michael Budd, Partner and Head of Company Commercial, explains that having the right approach to running a family business can reduce the risk of things going wrong.
Do I need a shareholders’ agreement?
Most family businesses have unwritten rules about how things are done. Sometimes they are communicated and understood by all. However, often these expectations are unspoken, and people may not know where discrepancies lie until issues arise. This can sometimes result in the interests of a family member not being aligned with the interests of the business.
Examples of this can often be seen in situations involving the breakdown of a relationship, divorce, incapacity, and death. Therefore, as with any private company, it may be wise to have a shareholders’ agreement. With a shareholders’ agreement, family members are allowed to establish the ground rules for how the business will be run and to ensure all family members are on the same page. The risk of dispute can also be minimised as the process of preparing the agreement allows family members to brainstorm together and talk over major issues and agree on how they will be approached.
What issues should we cover in a shareholders’ agreement for a family-owned business?
A shareholders’ agreement is a bespoke document that can cater to the needs and beliefs of each party. For a family-owned business, family members should consider the following issues to be covered in a shareholders’ agreement:
- How directors are appointed and how the board will take decisions
- Dispute resolution procedures
- How the business will be financed and how profits will be distribute
- Rules on transferring shares, including what happens when a shareholder dies or when divorce happens between the shareholders
- Rules on employment of family members
- Rules restricting shareholders from competing with the business
- Rules protecting confidential information.
Do I need to amend my company’s articles of association?
Depending on your circumstances, you may wish to amend the company’s articles to suit your needs and circumstances. If you wish to prevent disputes such as when shareholders have a disagreement, you may want to amend the company’s articles by adding appropriate dispute resolution procedures or mediation procedures.
How do I bring in outside investment but still retain control of a family business?
To retain control of your business, you need to control decisions taken at shareholder meetings and decisions taken at board meetings of the company. Generally, this means that you need to own more than 50% of the shares and/or voting rights of the company.
However, you may have to accept limitations on your control in order to attract outside investors.
How do I prevent family shareholders transferring shares?
Restrictions on the transfer of shares can be included in a shareholders’ agreement or the articles of association. For example, share transfers might require the approval of the board, or existing shareholders might have the right of first refusal on any shares being offered by another shareholder.
Webinar: Protecting Your Family Business in Uncertain Times (28 April)
We are hosting a webinar on 28 April to explain the measures you can take to protect your family business in uncertain times.
Michael Budd will tell you how to mitigate risk through good corporate governance. Richard Horwood will talk about family charters and John Wiblin will share some case studies about family business disputes that he has helped to resolve.
Here to Help
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
Published in Hertfordshire Chamber of Commerce Inspire Magazine, May – June 2022
NLA article not to be reproduced.