Family Businesses: Why they should have a Shareholders’ Agreement too

The owners of family managed businesses often query why they should have a Shareholders’ Agreement put in place. In most cases, these businesses have been run without issue in the past and therefore many will see such an agreement as unnecessary. 

However in practice, a Shareholders’ Agreement can serve as a useful document to quash minor disagreements from the outset. Not only will a Shareholders’ Agreement provide a clear plan to resolve difficult situations in times of need, it can also be a good tool to gradually hand over decision making to the next generation.

In summary, a Shareholders’ Agreement is a separate contract between a company’s shareholders and, quite often, the company itself. Such agreements vary in length and complexity and, as they do not usually need to be filed at Companies House, remain private between the parties.

Amongst other things, a Shareholders’ Agreement will seek to provide clarity and specific procedure on the below matters:

Shareholder approvals

In many small, family run businesses, there can be a slight distinction between the directors, who run the day to day operation of the business, and the shareholders, who own the business.

In some circumstances, the Companies Act 2006 requires that the directors obtain shareholder consent before taking a specific action. This can be useful where different family members fulfil the ownership and management roles. However, there are many other significant business changes which are not covered by statute, such as the decision to merge with another business, or sell a material part of the company’s assets.

A Shareholders’ Agreement can require the directors to obtain shareholder approval for any number of key strategic decisions, to ensure that all members of the family are comfortable with the direction of the business.

Dispute Resolution

Most Shareholders’ Agreements contain mandatory provisions which require the shareholders to follow a specific dispute resolution procedure in the event of a fallout. The inclusion of such wording ensures that any disagreements are dealt with using more cost effective methods, such as arbitration, rather than engaging in potentially expensive litigation in the courts.

Dividends

Many shareholders request that a Shareholders’ Agreement contains a specific dividend policy. This can be tailored depending on the circumstance, but will ultimately ensure that the family agree on how funds will be paid out of the business.

Share transfers

A Shareholders’ Agreement can contain provisions which govern the transfer of shares generally, or, in the event that a shareholder passes away.

These provisions are useful to clearly set out which transfers may or may not be permitted and who may own shares in the business. In many instances, owners are keen to ensure that all shareholders are direct family members, which can easily be achieved by a Shareholders’ Agreement.

Ultimately, a Shareholders’ Agreement will clearly set out the structure and responsibilities within a family managed business. This will avoid potentially expensive family disputes and ensure that everyone is working together to benefit the business as a whole.