Write It Down To Avoid Conflict

Article

16 May, 2012

Shareholders' Agreements advisable for Family Businesses

The basic documents to set up a company include little or nothing to deal with the relationships between owners. What happens in the event of a dispute between owners or the situation where one shareholder wants to give up his or her shares can be governed by a shareholders' agreement. These agreements formalise business relationships and put into writing what will happen in the event of a dispute. Many families or close friends in business are reluctant to create a shareholders' agreement as they do not see the need - they won't fall out, they're family! It can be advantageous for business owners with close relationships to put such an agreement into place so what happens in the event of a dispute or change of circumstances can be agreed in advance. This hopefully avoids dispute - where there's a question, the shareholders can look to the agreement for an answer without an argument.

A common misconception is that shareholders' agreements are public documents to be filed at Companies House. This is not true; shareholder's agreements are usually confidential documents available only to those who have signed it.

While working with family members or close friends has advantageous, there is the risk that personal problems will be carried across into the working environment or vice versa and can increase the risk of a breakdown in the working relationship. A shareholders' agreement can act as a safety net in the event of, amongst other things, breakdown in relationships, divorce, ill-health, retirement or death and allows for business succession to be planned.

Some families choose to put some or all shares (or other business assets) into a trust for the family. This can take away any individual ownership of at least part of the family business and so can remove the cause of many family business disputes. The terms of any such trust have to be very carefully considered to address different eventualities and the selection of trustees and their powers is critical. Anything agreed as to the operation of the trust and how it deals with its share ownership should always be set out in writing so that all parties know where they stand.

Shareholders in all businesses but especially those owned by close friends or family should consider putting in place a pro-active means of regulating future events, potentially saving money in fighting a dispute while also maintaining those close relationships in the long-run - regardless of what the future holds for the business.

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