Shareholder agreements: the document many family businesses leave too late

Family businesses are founded on trust, shared values and a long-term outlook. Those qualities are a strength, but they can also lead families to leave important arrangements undocumented. Informal understandings may work while everyone’s interests are aligned, but difficulties can arise when a shareholder retires, dies, loses capacity, divorces or disagrees with the direction of the business. A shareholders’ agreement can protect your family business, preserve family ownership and provide a clear route through difficult changes.

A well-drafted shareholders’ agreement allows the family to agree clear rules before a problem arises and should not be seen as a sign of suspicion. It is a practical way to protect both the company and family relationships.

What is a shareholders’ agreement?

A shareholders’ agreement is a private contract between a company’s shareholders, usually with the company itself as a party. It governs how the shareholders will work together and how important decisions will be made.

It should be prepared alongside the company’s articles of association. The articles are publicly available at Companies House, while the shareholders’ agreement can address commercially or personally sensitive matters privately, and are not filed at Companies House. The two documents must operate consistently, and it is typical for a shareholders’ agreement to take precedence over the articles.

The below are some typical areas a shareholders’ agreement might cover, all of which depend on the specific needs of the family.

Decision-making and family roles

The agreement can distinguish lines of responsibility between ownership and management. This is particularly important where family members have different levels of involvement in the business. It can specify who may appoint directors, which decisions the board may take and which matters require a particular benchmark of shareholder approval.

Ownership and transfers of shares

Transfer provisions can help keep ownership within the family by controlling who may receive shares and requiring shares to be offered to existing shareholders in specified circumstances. The agreement and articles can also address what happens when a shareholder retires, ceases to work in the business, dies, loses capacity or divorces.

The agreement can support an orderly transition to the next generation and balance the interests of family members who work in the business with those who do not. It should be reviewed alongside wills, trusts and tax planning as part of general succession planning.

A clear valuation mechanism may be included where compulsory transfers are set out in the agreement. This sets a process for how the price will be determined if shares must be sold, reducing the scope for later disagreement.

Divorce and relationship breakdown

A shareholder’s divorce can create disruption through forced valuations and scrutiny of the company’s financial affairs. If a spouse holds shares to take advantage of tax allowances, the family may want a clearly defined mechanism for returning them to family ownership.

Carefully drafted transfer provisions, supported where appropriate by pre-nuptial or post-nuptial arrangements, can help manage the risk. They cannot, however, restrict the powers available to the Court, although they are persuasive in establishing intent.

Dividends and exit

The agreement can establish rules for dividends, helping to manage different expectations between working and non-working shareholders. It should also include a provisions dealing with a future sale of the shares in the company or similar liquidity event (e.g, a sale of all the company’s assets, or a listing).

Keeping the arrangements up to date

A shareholders’ agreement should be reviewed (and where appropriate, followed) when ownership changes, a new generation becomes involved, a shareholder marries, divorces, retires or dies, external investment is introduced, or the family begins planning for a sale. The company’s articles should be reviewed at the same time.

The best time to discuss future events is while relationships are strong. The process encourages family members to clarify their expectations and agree a framework going forwards.

How we can help

Our corporate and personal tax and succession teams advise family and owner-managed businesses on shareholders’ agreements, bespoke articles and succession arrangements. We work with our family and employment colleagues where appropriate to provide a coordinated approach.