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Law for Business

Knowhow - guidance - precedents

25 MAR 2014

Family businesses: who decides what's fair shares?

Family businesses are big business - turning over more than £1 trillion a year. So they are also the companies that generate the most fall-outs. How can the families that own them avoid conflict? Dana Ewans of Jordans Corporate Law has some helpful advice.

Britain isn't so much a nation of shopkeepers as one of family businesses.

There are some three million family businesses in the UK - accounting for 66 per cent of the UK's small and medium sized enterprise (SME) firms. Between them they provide 9.2 million jobs and generate revenues totalling more than a trillion pounds a year.

That's big, big business in anyone's language. But ventures that start off in harmony and shared purpose can also go very badly awry.

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

Conflict can often arise around issues such as who should receive shares, who should receive dividends at the end of each year, what happens if one person wants to leave the business, the ownership of shares in the case of a divorce or the death of a family member.

Much of this can be avoided by making changes to the constitution (the articles) of the company from the outset. Yes, it sounds pessimistic when the business may still be in its very early stages and the family enthusiastic about its prospects. But if you don't have the mechanisms on place for resolving disputes, it can all too often lead to a family feud or the business closing down.

Jordans Corporate Law helps many family businesses begin life each year, and here are our top 10 points for families to consider before taking the plunge:

 1 Consider if it is in the best interests of the business for all the shares to be kept within the family, or whether some shares might beneficially go outside.

2 Once you've decided that, be clear about who should be the owners. For example do you want only certain bloodline family members or perhaps all as owners? Do you want to include partners (in the context of an "enduring family relationship") and their children or step-children?

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 yet to come on the scene.

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: perhaps there are some decisions that are key and should be undertaken by the whole family, while others can be delegated. Your company's share structure and associated voting rights should reflect all of this. For example, might it be useful to have some non-voting shares. Consider also a suitable quorum for meetings of directors and shareholders.

5 What if you or a family member want to sell their shares? Do you want to allow transfers of shares to other family members without directors' approval? Or should the other shareholders have a right of first refusal? How will the price be calculated? If you want other family members to have them, consider if can they afford them. If not, should the company buy them? How will you make sure that the company can afford to?

6 You may want to consider making some shares redeemable so investment can be made and then paid back at a suitable time in the future.

7 Dividends - what is fair and who decides upon them? Do you want to be able to distinguish between family members who are actively involved in the business and those who are "sleeping partners"? 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 to engage in the business.

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 exit strategies, as well as 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, members of family businesses would be well advised to enter into a shareholder agreement - but that's a topic for another article. But for anyone wanting advice, contact dewans@jordanscorporatelaw.com or visit www.jordans.co.uk

Jordan Publishing Employment Law

Jordan Publishing Employment Law

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Companies Limited by Guarantee

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The only book available that deals exclusively with such companies

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