Share ownership in Family Businesses

Often you hear from family business about difficulties with the uninvolved shareholders.

Not everyone in the second or third generation is best served by being involved in the business.  This is often not seen by the first generation whose judgement is clouded by family issues.  Those that are not involved may be supported by the family to do what is appropriate for them but without harming the future of those in the business.

Often the active family have had to buy out the uninvolved family members, who could vote against an increase in the share capital or just be concerned about events.  The events include: raising finance for expansion, or the company needing to use a building as security for borrowings when the uninvolved family operate another business from that building.

The shareholding can become so diluted that the business is robbed of its cash to pay dividends to an uninvolved extended family.

This is all avoidable if the first generation of the family are wise.   Part of the solution is to keep the financial satisfaction of the family separate from the business and have a suitable shareholders’ agreement.

Consider the following examples:

  • Exit routes on retirement or changed circumstances, e.g. existing shareholders having first option.
  • How shares will be valued and with suitable arbitration.
  • How will the board be constituted and have a quorum.
  • Procedures for new directors, e.g. non-exec director
  • Details plus Service Agreements covering Director roles and responsibilities, holiday, sickness and death.
  • Have a dividend policy setting out in the circumstances dividends will be paid. For example, priority of directors’ loans; retained profit prior to dividends.