Shareholder Agreements and “Accidental” Family Business Partnerships
I have always liked the term “accidental partnership” to describe family businesses. It was coined by Toronto based family business advisor Aron Pervin and succinctly sums up the unique challenges many business owners face when working alongside family members. After all, in a family business environment the owners of the business do not get to actively choose their business partners. Any relationship between two or more people has the potential for conflict. When you combine family dynamics with the pressures of running a business then the potential conflicts can be explosive.
The arguments for having a family shareholders agreement can be pretty compelling. Studies consistently show that only about 30% of family businesses survive into the second generation and only 12% make it to the 3rd generation. This is especially worrying when you consider the large number of baby-boomer business owners who will be looking to retire in the coming decade. A recent poll of Canadian small business owners found that 76% did not have a succession plan in place. A family business shareholders agreement can help mitigate against the likelihood of a major disputes causing irreparable damage to the business, ease tensions between family members and make the transition from one generation to the next more successful.
A family shareholders agreement can cover many different elements of how the business is run. Perhaps the most important clause of the agreement will address how conflicts will be resolved. A 2011 survey of family businesses in Australia found that 44% of conflicts were based on disputes over future strategy, competency of family members and succession issues. Of the families surveyed, 31% did not have any mechanism in place to resolve the dispute.
In putting a family business shareholders agreement together there are a few things to keep in mind.
Compromise
For a shareholders agreement to work in a family business it is important to ensure that the needs of all family members are taken into account at the outset. This will require some compromise from all members of the family.
Conflict of Interest
Your lawyer preparing the agreement cannot represent all the parties without full disclosure. This may be adequate if all the family members are in agreement on what is required. But should a dispute arise the lawyer who prepared the agreement would not be able to represent one or some of the family members. it is therefore advisable that each family member who will form part of the agreement have their own legal representation.
Over the next few weeks I will delve further into the content and provisions of a family shareholders agreement. Topics will include:
- Who controls the business
- Active and non-active shareholders
- Restrictions on transfer of shares
- Process for the sale of the business
- Forced buy/sell or shotgun sale of shares
- Death, disability and marital breakdown
A recording of my recent webinar on these topics can be viewed here.
