Managing the Family Business: 5 things you can do to safeguard it

1.         Family Charter 

Although these are not yet commonplace in family businesses, they probably should be. A Family Charter is not legally binding. So you may say “In that case what is the point of having one?”  There are many things in a business which cannot be reduced to a legal document either because the subject matter itself can never be legally enforced or because it is too vague to be capable of legal enforcement. This does not mean that they are unimportant.

A Family Charter can cover:

  • legitimate expectations as to career progression for of family members 
  • whether spouses and non-bloodline can join the business and, if so, their legitimate career expectations and entitlements to shares
  • what rights are family members to have to join the business and on what terms
  • what class of shares will family members who are active in the business be entitled to and when
  • whether family members who are not active the in the business are entitled to shares
  • in what circumstances (subject to anti-discrimination laws) will a family member be preferred over non-family
  • what happens when family members want to leave the business
  • how will family members be rewarded within the business
  • the disciplining of family members
  • rights to be appointed as directors
  • any additional code governing the members who are directors
  • long term aims for the business and other shorter-term factors which in other companies might be placed within a business plan
  • principles which will form the basis for transfer of shares to the next generation, for example to maintain balance if two families are involved
  • consultation on decision-making for non-day to day matters and discussion by what is sometimes called a Family Council. 

 2.         Shareholders’ Agreement 

This private agreement between the shareholders in a company is the place for the detailed regulation of members’ rights and control mechanisms. Since it is not registered at Companies House, additional matters can safely be inserted here to ensure confidentiality. 

These are not one-size-fits-all agreements. A Shareholders’ Agreement where the shares are held 50:50 by just two equal shareholders will be substantially different from one where shares are held 60:20:20 or 25:25:25:25 when the dynamics of the balance of power are very different. 

Matters which are commonly contained in the Articles of Association may be preferred to be put in a Shareholders’ Agreement for privacy. However, if there is more than one class of shares, the rights attaching to the different shares will still have to be registered at Companies House. 

3.         Employment contracts 

Employment contracts, including directors’ service agreements, are frequently neglected in family businesses. Small wonder then that roles can end up being ill defined and with no performance benchmarking. Proper contracts help and protect both the company and the individual.  

4.         Long-term incentive plans (LTIP) 

These may be tied in with arrangements for the shares or they may include other incentives. The purpose is both to incentivise and also retain good talent. In the context of family businesses it will be also to ensure that the family continues to be a place where members want to work for long term benefit and to build their careers and to ensure that the business can ultimately be transferred to the next generation. 

The types of LTIP available are numerous and the one that best suits the business, shareholdings and career progression can be selected. 

An advantage of having an LTIP as a additional bolt-on to the general regulation of shareholdings is the flexibility it can give to incentivise particular individuals outside the strict confines of the main class of shares. 

5.         Articles of Association 

In a family business where several members of the family are involved, standard Articles are unlikely to suffice, unless everything has been relegated to the Shareholders’ Agreement. 

Particularly where there is a need for different classes of shares, for example to enable differential dividends to be paid, bespoke Articles should be put in place which dovetail with the Shareholders’ Agreement.

Before everything is rashly put into the Shareholders’ Agreement and the Articles are ignored, one point in particular needs to be borne in mind: if a Shareholders’ Agreement is breached then the affected shareholder will have to bring an action for breach f contract, whereas actions done in breach of the Articles will usually be automatically ineffective with no further steps being required.