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Do I Need a Shareholders’ Contract to Operate my Family Business?

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Last Updated on July 2, 2024 by Kanakkupillai

It’s common to think that “no matter what happens, we’re family,” thus, if conflicts emerge in a business endeavor, everyone involved—including family members—will be able to work things out amicably. Shareholders Contract: Family disputes are typically the most intense and acrimonious because of the strong ties that bind family members together. It’s simple to undervalue the significance of an agreement when dividing up the duties and rights of shareholders within a family company. You could think that a shareholders’ agreement betrays contempt for certain members of your family, upsetting the balance of the business and family relationships. This article will discuss if a shareholder’s contract is necessary for running a family business.

We could say that the reverse is true.

The major purpose of a shareholders agreement is to ensure that there is guaranteed equitable treatment for all business owners. Further, it also specifies and forms a ground for the procedures for managing the business in case of any emergency that occurs or has occurred.

When there is a set of policies and procedures that every shareholder has to adhere to, it limits the scope for any disputes. Which further stops any legal actions in the future.

A shareholder’s agreement should ideally gather dust in a file cabinet while family members grow the company together through joint decision-making. If things don’t go according to plan, the agreement will serve as a backup plan.

What is a Shareholders’ Contract?

A shareholder’s contract can be understood as nothing but a private agreement signed by the company and the shareholders. It is confidential and also governs the company operations and the relationship between the shareholders.

It should always be kept private as it is confidential and registered in the company’s house, contrasting with the AOA, i.e., Articles of Association of the entity.

The Goal Of A Contract With Shareholders

In brief, an agreement among shareholders will.

If a shareholder passes away or becomes incapacitated, you have to:

  • Talk about the dispute resolution procedure in the future.
  • Specify the share transfer procedure and the sorts of transfers that are permitted.
  • Protect the business against harm as well as its minority stockholders.
  • A shareholders’ agreement can be as long and detailed or as short as its drafters decide. However, it should always be customized to your family company’s unique facts, situations, and personalities.

Importance of Shareholders Agreement

Let’s now try to understand why having a shareholders’ agreement in business is important to run your own family business. Directors in a company are busy daily with carrying out the entity’s operations. Hence, it is vital that the shareholders of the company have some base for holding these people accountable for their processes. 

That is, the shareholders should mandate that the directors should get approval from the shareholders for particular things or before making any important business decisions which will also help them safeguard the rights of the minority shareholders of the entity.

Here, the minority shareholders are the ones who hold shares less than 26% in the business, and due to the same, without any shareholder agreement in place, they will not have any legal protection.

Further, having a shareholder’s agreement in place will also protect the business and the shareholders and aid in mitigating any family disagreements. Shareholders’ agreement should also aid the company in ensuring good succession planning, which will not stifle the company’s functioning in the long run. This will ensure ample growth and development for the company.

What impact cannot having a Shareholders Agreement have on a family business?

Personal conflicts are typically the root cause of the biggest issues in family businesses, which may not surprise most of us. This means:

  • Conflicts between the younger and older generations
  • Family members that are not living together but are attempting to participate in business matters
  • Sibling rivalry for better-paying occupations, higher positions, and family members using their ownership share as a “weapon.”

Benefits offered by the Shareholders Agreement to a Family Business

In simple words, we can say that a shareholder’s agreement is crucial to ensure the smooth running of a family in the present and the future.

Share sales and issuances have the ability to split a business. If share transfers remain unregulated, a family member may sell all or a portion of their ownership interest to an outsider, endangering the continuity of family influence over the business.

First, you may prevent this by putting in place a process that requires the shares to be offered to the other shareholder’s contract or by obtaining shareholder permission before any share sale. Internal conflict can occasionally arise in family companies because minority owners—typically younger generations or extended family—have little to no control over the firm’s administration.

In addition to a proper employment contract or service agreement if they are also directors, a shareholders’ agreement can explicitly explain each family member’s involvement in the day-to-day operations of the firm as well as more significant decisions.

How do we determine the value of stock?

A shareholder agreement for a family business typically has the following terms; however, there are many more that may be added:

  • Guidelines for estimating a stock’s worth: It is customary to provide a process for determining the fair value of the shares to prevent any disputes over the asking price of shares in the case of a sale.
  • The power of Veto in restricted areas: These safeguards guarantee that existing owners can buy new shares before the public is made aware of them. A shareholder’s contract has to be able to limit who can purchase shares to prevent dilution. In a family business, extra measures can be in place to stop assets from leaving the family.

Conclusion

Regarding the future, it’s critical—though painful—to make plans for succession and the unanticipated passing or departure of family members. It can save you and your family a great deal of time and stress, as well as avoid arguments about the distribution of shares and responsibilities in the event of a shareholder’s death if you establish a protocol for this scenario in your shareholder agreement while mirroring those provisions in each shareholder’s contract will. 

It is important to understand how important it is to have a shareholder’s agreement for running your family business. This is because every family business is in a catapult of issues. And this will affect the growth and the potential the business holds.

It is equally important that you set the shareholder’s agreement with the help of consultants who have market experience and have served a clientele. So, you are in the right place, as Kanakkupillai is the best city to assist you in setting up your shareholders’ agreement for your family business.

Family businesses are one of the important bones of the Indian Economy and its cultural background. Kanakkupillai can help you set a shareholder’s agreement, which will help you take dispute resolutions, transfer shares easily, share dividends or profits, get the valuation of shares and other clauses that can be customized and set according to the nature of your business.

Families that own and run businesses see them expand and change over time. As companies acquire traction, outside investors may join the company, and non-family employees are hired and allocated to different organizational roles. With each new familial generation, marriage, or partnership, the number of stockholders grows.

Families bring value to organizations through their years of expertise in the business. But they also add levels of connection, complexity, and danger to the companies they own and manage and everyone else engaged. This may make it difficult to win over investors and obtain outside funding when necessary. If these factors are handled poorly, it may even eventually jeopardize the company’s long-term viability.

There are several benefits to dividing ownership and managerial authority. By having a team of specialists operate the firm with various talents required to run it well, separation guarantees the company’s viability. If future successors are not very interested in participating in the firm’s day-to-day operations, this guarantees continuity within it.

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Reema

Welcome to www.kanakkupillai.com! Greetings, I'm Reema, a Legal Conflicts Analyst with a fervent commitment to resolving legal disputes and ensuring a fair and just resolution for all parties involved. My extensive experience in analyzing and mediating legal conflicts, coupled with a deep understanding of the nuances of various legal domains, positions me as your reliable guide in navigating the complexities of legal disputes. I firmly believe in promoting diversity and inclusivity within the realm of legal conflicts, ensuring that all individuals, regardless of their backgrounds, have access to impartial and equitable conflict resolution. I am privileged to be a part of your journey towards achieving resolution and clarity through this blog. Here, I will provide valuable insights and strategies tailored to help you navigate legal challenges effectively. Thank you for entrusting me with the opportunity to assist you on your path to resolution and legal peace. For more information and resources, please visit www.kanakkupillai.com.