Family Business Shareholder Agreements
Having a binding Family Business Shareholder Agreement in place is essential. A shareholder agreement is an important document that protects the shareholders of a family business from avoidable conflict and disagreements. A family business has a much greater chance of prolonged success when a shareholder agreement is in place.
A shareholder in a family business is someone who benefits from the business either by receiving dividends from the business and by having the right to vote for the individuals who are elected to the business’s board of directors. Typically, a shareholder is also entitled to some form of financial compensation if the business is sold. Essentially, a shareholder is a whole or partial owner of a business. When there is more than one shareholder in a family business, it makes sense to have a shareholder agreement in place.
“Creation of a binding legal agreement that defines how parties will do business together is essential. Inclusion of agreement to mediate any disputes is important, as is binding arbitration if mediation is not successful. Nearly always when there is an agreement for binding arbitration, that process does not get used because individuals would rather make the final decision for themselves.”
Blog Post Nov 12, 2015 “What it takes for a Family Business to be Successful”
Purpose of a Family Business Shareholder Agreement
The goal of shareholder agreement is to create a binding legal document that outlines how shareholders will contribute to the business and will work at all times with the best interest of the company in mind.
The following sections are typically part of a Family Business Shareholder Agreement:
- Guiding Premises
- Shareholder Prerogatives and Responsibilities
- Decision Making
- Sale or Transfer of Shares
- Impasse Resolution
There’s little doubt that disagreements will occur among family business shareholders at some point in time. Sometimes, a small conflict left to brew will eventually lead to a major disruption within a family business. In the most severe circumstances, a disagreement among shareholders can lead to the ultimate demise of the business.
Disputes must be handled swiftly and fairly. A shareholder agreement can serve to leverage dispute resolution before a conflict gets out of hand. Shareholders are bound by the dispute resolution procedure specified in the shareholder agreement, which may call for mediation or arbitration. In most cases, however, conflicts within a family business that has a shareholder agreement in place do not wind up in arbitration.
If your family business does not have a shareholder agreement, now is the time to develop one.
The Importance of a Family Business Shareholder Agreement
Any family business that attempts to operate for an extended period of time without a shareholder agreement in place is destined for disagreements and conflict. When a Family Business Shareholder Agreement is enacted, the chances for shareholder discord are significantly reduced. A shareholder agreement can be customized for your individual business, and should be written to address the specific needs of your unique family business.
Does Your Family Business Need Help?
Family Business Matters has extensive experience assisting family businesses in the development of a Family Business Shareholder Agreements. With many decades of experience, we understand the wide variety of challenges that families face as they work together to build, grow and sustain a thriving family business generation after generation. Through conferences, continuing education programs, family business retreats, speaking engagements and private family business consulting services, Family Business Matters has assisted more than 450 family-owned businesses around the world chart their way through family business issues of all shapes and sizes.
For more information on how Family Business Matters can help your family business survive and thrive, please contact us today at (970) 948-5077.