• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 4/25/2014

Some key learning points about shareholder agreements in the family business 

Some key learning points
Previously in the series:
  1. Introducing KPMG’s Sages Family Business Story
  2. The Sages Family Business Story: An entrepreneurial success
  3. The Sages Family Business Story: Planning the future
  4. Sages Business Case: Estate Planning for the family business
  5. Some Key Learning Points about Estate Planning for the family business
  6. Sages Business Case: Financing growth
  7. Some key learning points about financing growth for the family business
  8. Sages Business Case: Planning ownership for future generations

Without such rules, individual shareholders have the ability to sell their shares to any outsider, which can put family ownership in jeopardy. The objective of these agreements is to ensure that ownership stays within the family while providing a degree of freedom to shareholders.

Forward planning and family business continuity

Trying to source cash in an emergency to buy-out a disgruntled shareholder – while negotiating the price of his/her stake – can damage both the family and the business. Planning ahead requires the establishing of processes to value and transfer shares, being aware of the owners’ ambition for the business and monitoring the personal needs of the individual shareholders.

Shareholders pacts, articles of association of private holding companies, trust structures (in certain jurisdictions)… are just some of the ways to secure family ownership. This is an area where experts should be involved and options considered. Families should clarify their long-term goals before considering legal and fiscal advantages and constraints. As an example, the use of trust structures can bring an inheritance tax saving and may promote collegiality, but their misuse can lock the next generation into “golden handcuffs”. The same may hold true for other forms of ownership agreements.

Reinforcing shareholder loyalty

Feeling locked in can trigger the search for an exit. To paraphrase a family member: “the door must be open, but with enough incentives to stay inside”. The incentives are dividends but not only: information on the business, company visits, family meetings and other activities help to foster the “emotional” attachment of family members to the family business.

Topics to be considered

  • Definition of the potential ownership group: a “hot” topic is whether spouses can be owners, and if not, how to ensure that ownership is protected through prenuptial agreements, wills, forced buy-back of shares, etc…
  • Mechanisms to sell shares: the options available may include, informing the board of directors or owners’ council, offering shares to certain members of the family first (e.g. the seller’s “branch”), share buy-back by the company, right of first refusal, occasional “liquidity” event, annual liquidity event, on-going internal market (when many shareholders), etc.
  • Valuation: if not properly addressed, valuation can trigger major conflicts. Several options exist including regular valuation of shares by outside experts, arbitrage mechanisms, etc.
  • Cash reserves: ensuring cash is available to buy-back shares and maintain steady dividends. Reserves can be built with retained earnings, but also the sale of some assets (e.g. real estate, business unit), etc.
  • Pre-agreed buy-out option: some specific clauses can force a potential buyer to make an offer to all shareholders
  • The involvement of a governance body to monitor ownership: as mentioned above, this can be a role for the board of directors of the family holding company, for the owners’ council or family council, for a specific committee.

Sharing the family business vision

Some families regularly ask themselves whether they wish to remain owners of the business – or even if they are the right owners for the business. Fundamental questions such as these below are best addressed during settled periods:

  • What does it mean to be an owner? What are the owners’ expectations towards the business? (Dividends, level of risk, return, role in society, etc.)
  • Does the family wish to hand the business over to the next generation?
  • Is it acceptable for an owner to sell his/her shares to other members of the family? If so, will this person still be considered a member of the family?
  • Is the family ready to accept the entry of non-family investors?

Christine Blondel

Christine Blondel
Christine Blondel is adjunct professor of Entrepreneurship and Family Enterprise at the Wendel International Centre for Family Enterprise at INSEAD.

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