Shareholders' agreements for family companies

Why the standard template is not enough

A conventional shareholders' agreement is built for co-founders or investors: people who joined a venture on commercial terms and will leave it on commercial terms. A family company is different in three ways. Ownership passes by inheritance and gift rather than sale, so the agreement has to cope with holders who did not choose to be shareholders. The shareholders are also, in many cases, employees, directors and relatives at once, so the roles have to be separated on paper. And the time horizon is generational, which means the agreement will outlive its drafters and must be built to be amended.

LegalMatrix prepares the family version of its shareholders' agreement product on this basis, and pairs it with constitutional amendments so that the rules bind the company and future holders, not only the signatories.

Separating control from economics

The first design decision is whether every family member's share carries the same vote. Many families separate the two: voting shares held by those running the business or by a family trust, and non-voting or limited-voting shares held by the wider family, so that value can be spread without spreading control. Company law in all ten LegalMatrix jurisdictions allows multiple share classes, and the constitution defines them. The agreement then sets the reserved matters that need the wider family's consent, such as a sale of the business, a change of dividend policy, borrowing above a threshold or admitting a non-family shareholder.

• Decide who appoints directors and whether the board must include independent members.
• Fix a quorum and a casting vote so that a family dispute cannot paralyse the company.
• State what the family council can decide and what it may only recommend.

Transfers inside and outside the family

Transfer provisions do the heavy lifting. Permitted transfers to spouses, descendants and family trusts should be allowed without pre-emption, subject to the transferee signing a deed of adherence. Everything else should trigger pre-emption rights in favour of the family, at a price set by a valuation formula or an independent valuer. Compulsory transfer events need to be listed explicitly: death (where the estate may be required to offer shares back), incapacity, divorce (so that a former spouse does not become a shareholder), bankruptcy and material breach.

The funding of buy-backs is the part most often left vague. The agreement should say whether the company, the other shareholders or a family trust buys, over what period, and whether insurance is held to fund a purchase on death. In Singapore, Hong Kong, the United Kingdom and Malta a share buy-back by the company has statutory conditions; the LegalMatrix review note sets them out.

Family employment and remuneration

Few things divide families faster than a relative on the payroll who is not pulling weight, or a family executive who is underpaid relative to the market. The agreement, or a family employment policy cross-referred to it, should set objective entry conditions (education, outside experience, an open vacancy), market-based pay set by a remuneration process that family members do not control for themselves, and a performance process that applies to family and non-family staff alike. Where a family member is also an employee, the good leaver and bad leaver provisions need to say whether loss of employment affects shareholding at all; in a family company it often should not.

Dividends, reinvestment and liquidity

Shareholders who do not work in the business want income; those who run it want to reinvest. The agreement should contain a dividend policy, for example a fixed percentage of distributable profit after a reserve, reviewed every few years by the family council. A liquidity mechanism, such as an annual window in which the company or a family fund offers to buy a limited number of shares at formula value, gives the wider family an exit without forcing a sale of the business. Both mechanisms must respect the solvency and distributable-profit rules of the jurisdiction, which the constitution and the resolutions pack enforce.

Succession and the next generation

Succession is partly a legal mechanism and partly a process. The legal mechanism is the combination of share classes, transfer rules and trust structures that moves control on the timetable the family intends; see the LegalMatrix guides on giving a successor equity and on trusts versus holding companies. The process is set out in the family charter: how a successor is identified, what experience they must gain, who decides, and what happens to the current leader's role and remuneration. The charter is usually non-binding, with its binding elements placed in the shareholders' agreement so that the two documents cannot conflict.

Dispute resolution that keeps the family together

Litigation between relatives is public, slow and corrosive. The agreement should provide for escalation to the family council, then mediation, and only then arbitration (confidential) or court. Deadlock between two branches needs a mechanism, such as a buy-sell offer or a casting vote by an independent chair, so that a stalemate cannot destroy value. In all ten jurisdictions minority shareholders have a statutory oppression or unfair prejudice remedy that cannot be excluded; a well-drafted agreement makes it unnecessary to invoke it.

Information is the other pressure valve. Family members who are not on the board should receive annual accounts, a management summary and notice of major decisions as of right, with a confidentiality obligation attached, so that disputes do not begin with a feeling of being kept in the dark. The agreement should also fix how it is amended (a supermajority of each class, or of each family branch) so that it can evolve without unanimity, which becomes unattainable as the family grows.

The LegalMatrix family holding and trust documents product combines the shareholders' agreement, constitution, trust deed and family charter into one matched set, signed off by a lawyer admitted in the jurisdiction, with GoGoTrust administering the holding company afterwards.