Shareholder agreements are critical. These company playbooks ensure all shareholders are treated fairly. They lay out how a company will be operated and managed, spell out the rights of various shareholders and establish guidelines for who makes company decisions.
But shareholder agreements can be problematic. They lead to family conflict, or they are signed too late in the game, or they ultimately aren’t finalized, says Steve Legler, a family legacy guide based in Montreal.
“Fifty per cent of shareholder agreements never get signed,” he says, citing data from BDO Canada.
The reasons for this are myriad. Sometimes the original agreement no longer reflects the wishes of all family members or the state of the current business. Or there are no guidelines for managing conflict, or it lacks rules spelling out how money is distributed to shareholders, according to BDO.
As a result, it often falls to the family office advisor to act as a catalyst for signing. The best approach is to have a family draft the shareholder agreement as soon as possible. It’s also a good idea to be in constant touch with family members while the agreement is being drafted, to ensure everyone’s wishes are reflected in the document.
Finally, nudging members routinely to review and sign the document can go a long way in ensuring it is ultimately drafted – and signed.
Troubleshooting: handling family dynamics
A shareholder agreement should be comprehensive to avoid confusion. It should stipulate who is in charge of day-to-day operations and who will be eligible for a seat on the board of directors. It should also include provisions for pricing shares fairly, state which outside parties will be allowed to become shareholders, and detail how minority positions will be protected.
While shareholder agreements are essential in ensuring the security of a business, they can often be derailed by families, particularly those that have expanded considerably since their business was founded. As a result, putting a shareholder agreement in play early on in a business’s lifespan should be priority No. 1.
“I generally try to get it done at an early stage,” says Raymond Adlington, a partner with Miller Thomson LLP in London, Ont. “Set those expectations [regarding conduct] before other family members become actively involved.” He says once children start marrying, their life partners — and their children — will enter the mix, potentially complicating things.
“The earlier you embark, the better,” confirms George Angelopoulos, vice-president, tax department and a family business advisor at Richter in Montreal.
Co-creation is best
But just drafting a document quickly and pressuring everyone to sign it won’t suffice. Often, “one person prepares it and then there’s no buy-in,” says Legler. “Someone will say: ‘That’s not what I agreed to.’ Then things get blown up.”
For example, he says, often a patriarch or matriarch have their lawyer draft an agreement without discussing it with the children. This document may appear self-serving and heavy-handed and lead to the children having their lawyers review it, ad nauseam.
As a result, Legler suggests involving all shareholders early, and ensuring all viewpoints are reflected in the agreement. “Have people co-create the document,” he says.
Angelopoulos agrees. He favours an approach in which the family is presented with a variety of scenarios, such as what would happen to shares in the event a family member were to die or become disabled.
Frequent communication is important
Using a trusted – and flexible — lawyer is also a good strategy. Legler says that the best lawyers are the ones who have drafted many shareholder agreements and who favour shorter documents that may not require lengthy reviews.
Legler also suggests asking the lawyer to use the simplest language possible and to be prepared to remove language that other shareholders find confusing. “Ask the lawyer: ‘Just take out the clauses that are problematic,’” he says.
Throughout the process, the family office should check in frequently, acting as a shepherd when issues arise. “They can help negotiate it through,” says Legler.
Angelopoulos says discussing worst-case outcomes can be sobering for families, but it can also act as a motivating force in getting the document signed.
The key is to ensure the shareholder agreement is a document that accurately reflects the wishes of the entire family, Angelopoulos says.
“This isn’t about taking cookie-cutter clauses about what happens when someone needs to be bought out,” he says. “It’s about understanding the dynamic within a family and achieving a result that makes sense for that family dynamic.”
Next month: Shareholder agreements and taxes.
Please visit here to see information about our standards of journalistic excellence.