Common Provisions of a Family Shareholders Agreement
There are several important provisions to include in a family business shareholders agreement that extent beyond the management of the business. These include disability of a shareholder, death of a shareholder, marital breakdown and finance.
Disability of a shareholder
This is particularly important when the shareholder is actively involved in the day to day running of the business. This provision will help provide disability payments to the shareholder. For some businesses, this provision can require a shareholder to sell their shares in the case of a long-term disability. These clauses must be drafted carefully and be consistent with the terminology used in the insurance policy that will fund the disability.
Death of a shareholder
The ability of a shareholder to transfer shares to an heir upon their death will be dependent upon the succession plan of the family. It is very common to see significant restrictions on who can inherit shares in the business and insurance is usually used to fund whatever buy-out is required. When drafting theses clauses it is important for your lawyer to work closely with the insurer and your accountant so that the policy works in the most tax effective manner for the estate of the deceased, the purchaser and the company.
|Shareholder Agreements and “Accidental” Family Business Partnerships|
|Family Business Shareholders Agreements –
Restrictions on Transfer of Shares
|Family Shareholders Agreements –
Who Controls the Business and for How Long?
In Ontario, the Family Law Act provides for a property equalization mechanism. If the shares in a family business represent a large proportion of the net family value a mechanism will need to be in place to fund the buy-out of the soon-to-be divorced or separated spouse. Alternatively, shares in the business may have to be transferred to settle the equalization claim. It is a sensitive and complicated area within shareholder agreements. Some family business require that marriage contracts be signed that exclude the value of the shares in the family business from the net family property as a condition of owning the shares in the business.
Finally, your family business shareholders agreement can also be used to address the question of how the business is funded. Not all members of a family are likely to have the same resources. The agreement can deal with how the family handles financial matters such as cash calls, loan guarantees and other financial contributions.
When preparing these provisions it is important to remember that all members of the family should have their own legal representation to help ensure everyone understands what they are signing. More details on shareholder agreements are available on this webinar.