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Law for Business

Knowhow - guidance - precedents

06 SEP 2012

Family Businesses - Fair Shares?

Jordans Ltd

Family dynamics are such that there is probably greater potential within family businesses for disagreement than in other types of business. 

Often, conflict can arise around the issue of shares. Much of this can be avoided by making changes to the constitution (the articles) of the company from the outset. 

Here are our top 10 points to consider in this area before taking the plunge:  

1        Consider if it is in the best interests of the business to be kept in the family.  

2        Having decided that, be very clear about who should be the owners. For example do you want only certain bloodline family members or perhaps all as owners? You might also consider the new definition of partner and effectively family in the new Companies Act 2006.  

3        Think about in-laws and partners, particularly in the longer term. Consider the impact of divorce or relationship breakdown and don't forget partners or spouses who may join the family in the future.  

4        Different classes of shares can have different voting rights. So think about who is to have control, how decisions are going to be reached - maybe there are some decisions that are key and should be undertaken by the whole family. Your company's share structure and associated voting rights should reflect all of this. For example, might it be useful to have nonvoting rights attached to some shares? Consider also a suitable quorum for meetings of directors and shareholders. 

5        Decide what should happen if you want to sell your shares, or a family member does. Who should the shares pass to? For what price? How will this be calculated? If you want other family members of the family to have them, consider if they can afford them. If not, should the company buy them and how will you make sure that the company can afford to? You may want to consider making some shares redeemable so that investment can be made and then paid back at a suitable time in the future.

6        It is possible to impose restrictions on how many shares can be sold in a year. Would that be appropriate?

7        Don't forget dividends - what is fair? What are the tax implications? Do you need to keep some profit to reinvest or to buy shares a family member no longer wants?

8        Consider the next generation and how they might be represented and encouraged.

9        In the event that a dispute gets serious, think about what you want to do to resolve it. There are provisions that you can include in your articles to deal with this.

10      Finally, think about who you want to inherit your shares. Who do you want to take over the business and very importantly when will you be ready for them to do so? In many cases, family businesses would be well advised to consider entering into a shareholder agreement. We will be looking at shareholder agreements in a future issue of Corporate Focus. In the meantime, if you'd like to discuss how you can ensure your company's articles meet the needs of your family business, contact Helen Goose. helen_goose@jordans.co.uk.

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