A Shareholder Agreement Can Help You Prepare for the Unexpected

Think of it as a prenuptial agreement for a family business — a mechanism to reduce hard feelings and provide for an equitable distribution of assets. Officially, it's called a shareholders' agreement and it lays out the ground rules of a family business in terms of governance, succession, the transfer of assets, liquidity and other issues.

Here are six issues that are often included in the shareholder agreements of family-run businesses:

  1. Board composition, which can take into account representation for each sibling — or spouse — and whether to bring in outside, independent directors.
  2. Voting requirements, including the number of votes needed to approve key business issues. For example, do you need a simple majority or unanimous approval?
  3. Management positions, including provisions about whether jobs are filled from inside or outside the family and what training or experience is required.
  4. Participation in the business. The agreement should address the rights of family members who don't want to be involved, as well as those who do. It should also set the rules for levels of experience, training and education.
  5. Profit distribution. The agreement should set out a dividend policy that could, for example, determine a set percentage of profits to be paid out, unless the board decides to make a change. This can help defuse tensions between passive owners, who may want as much cash as possible, and active members, who may want to preserve or reinvest cash.
  6. Compensation for active owners that's separate from profit distribution. Again, the board should set compensation levels, strategic goals and levels of experience required for certain salary levels.

Ownership and Succession

A shareholder agreement should address ownership and succession to help ensure the business stays in the family. Here are some issues to consider:

We Help You Get to Your Next Level™

Get in touch today and find out how we can help you meet your objectives.

Call Us