Protecting Family Businesses: what every shareholder needs to know

According to research by the Institute for Family Business there are 5.1 million family businesses in the UK employing over 14 million people. Shareholders are likely to have thought about protecting family businesses during the Covid-19 pandemic and the challenges faced by the whole economy.  Michael Budd, Partner and Head of Company Commercial, answers the key questions that every shareholder of a family owned and run company should know.

How are family companies structured?

Family companies are much the same as any other company and do not have any special status in company law. However, certain matters are of particular importance to the shareholders in family companies and these are expanded upon below.

What are some of the issues with a family-owned company?

The board of directors has day-to-day control of the company and who is on the board and who can appoint or dismiss board members will be important. The extent to which shareholders are involved in decision-making depend on the rights attaching to the share they hold and the terms of the company’s articles of association and shareholders’ agreement (if any).

What are some of the things that I should be thinking about in relation to a family-owned company?

The company’s articles of association will set out what share capital a company has and what rights attach to such shares. If the company has adopted bespoke articles of association the rights can be tailored to meet the objectives of the family. It is possible to create shares of different classes with different rights attaching to them. It is also possible to include provisions that allow the company to pay dividends to different shareholders at different times and different amounts.

It is also necessary to think about to whom shareholders in the company can transfer their shares and if there will be restrictions on them being able to transfer their shares to their spouse or civil partner.

What documents are needed for a family company?

A company’s articles of association must always be filed at Companies House and they are publicly available. They set out how the company appoints and dismisses it directors, how directors manage the company, the company’s share capital, the rights attaching to share rights and restrictions, how shareholder meetings operate and provisions relating to the transfer of shares.

It is possible to draft a shareholders’ agreement between the shareholders and potentially the company. The agreement will contain provisions whereby the parties agree on matters relating to the operation of the company. It is a private document and so private family matters should be included in it rather than the articles of association which are public. In it the shareholders can agree how they will exercise their voting rights in certain situations. For example, the shareholders can agree that they will not use their votes to amend the articles, issue shares or appoint directors without the board’s prior approval to such action. Alternatively, if its desirable for the shareholders to have more control, the shareholders’ agreement can set out matters which limit the board’s power. For example, the board of directors may be required to obtain shareholder approval before issuing more shares, making large investments or disposals. Often referred to as reserved matters, the shareholder can limit the scope of the board’s powers.

What are the legal issues a family business can face?

John Wiblin, Partner and Head of Dispute Resolution, has written about some of the legal issues that can arise within family businesses and how to avoid them.  Read his Legal Matters Q&A: Family Business to find out more.

Webinar: Protecting Your Family Business in Uncertain Times (28 April)

We are hosting a webinar on 28 April to explain the measures you can take to protect your family business in uncertain times.

Michael Budd will tell you how to mitigate risk through good corporate governance. Richard Horwood will talk about family charters and John Wiblin will share some case studies about family business disputes that he has helped to resolve.

Booking

We are co-hosting this event with the Hertfordshire Chamber of Commerce and it is free to attend.

Please book on the event page of the Hertfordshire Chamber of Commerce website.

Protecting Family Businesses

If you would like advice about the structure and governance of your family owned business, please get in touch with Michael Budd on 01992 305234 or michael.budd@longmores.law