For many family businesses, succession planning is only part of the picture.
Once a family has considered its long-term business plans, the next question is how those plans should be implemented in practice. As time goes on, ownership can become more complex and different generations may become involved in the business in different ways. This is where governance arrangements can play an important role.
Family constitutions and shareholders’ agreements are often at the centre of those arrangements. While they serve different purposes, together they can help families navigate decision-making, define responsibilities and address issues that commonly arise as a business evolves.
Family constitutions can be a useful tool for setting out a family’s values, objectives and expectations. They can also address issues such as succession planning, family employment within the business, communication between family members and approaches to resolving disagreements. Importantly, the discussions involved in creating a constitution can be just as valuable as the document itself, helping families to consider how they want the business to operate on a day-to-day basis, and in the years ahead.
A shareholders’ agreement provides a legally binding framework governing the relationship between the owners of the business. It sits alongside a company’s articles of association and can address practical issues such as voting rights, board appointment rights, dividend policies, restrictions on the transfer of shares, the introduction of new shareholders and matters requiring shareholder consent before action can be taken.
Shareholders’ agreements can also help address how ownership changes over time, providing agreed mechanisms to deal with events such as a shareholder exiting the business or transferring their shares. For family businesses, documenting these arrangements at an early stage can help avoid uncertainty as ownership passes through generations. In some instances, this may simply be a case of putting long-standing informal arrangements down ‘on paper’. In others, it can encourage family members to consider issues and scenarios that may not previously have been discussed.
One of the first issues many family businesses need to consider is the relationship between ownership and control. Not every shareholder will necessarily be involved in the day-to-day management of the business. Equally, not everyone involved in the business will have the same level of ownership.
We regularly help clients work through questions such as:
• who should have voting control;
• whether different classes of shares should be used for different branches of the family;
• which decisions should require shareholder approval; and
• how future generations will participate in ownership and decision-making.
There is rarely a single ‘right’ answer. What works for one family may be entirely inappropriate for another. The appropriate structure will depend on factors such as the family’s objectives, the level of involvement of different members and the future direction of the business.
A shareholders’ agreement can help give effect to decisions in practice. For example, families may choose to identify certain “reserved matters” that require specific shareholder approval. These are typically significant decisions such as taking on substantial borrowing, issuing new shares, acquiring another business, changing the nature of the business or making structural changes. By tailoring these provisions, families can determine which decisions should remain within the control of voting shareholders.
We have found these considerations to be particularly relevant in the care sector, where many successful care home groups have grown from founder-led businesses into multi-site operations involving a number of family members across ownership, management and leadership roles. As those businesses expand, questions around decision-making, investment, succession and control become increasingly important. Governance arrangements that worked well at one stage of the business, may actually need to evolve as the organisation grows.
The objective is not to create unnecessary complexity, but rather, to ensure that the business is equipped to deal with change as it arises. Our corporate team works closely with family businesses to develop governance arrangements that reflect their particular circumstances, objectives and succession plans. Whether that involves discussing a family constitution, putting a bespoke shareholders’ agreement in place or reviewing existing arrangements, we can help create a structure designed to support both the business and the family behind it for the long term.
Contact our team online or call 0345 209 1000 to speak to our team.
The objective is not to create unnecessary complexity, but rather, to ensure that the business is equipped to deal with change as it arises.