Ulster Tatler – June 2019

This month, Catherine emphasises the importance of contracts in family businesses.

How best to protect your

family business

Northern Ireland has a buoyant family business sector with a higher

ratio of family run businesses than any other region in the UK, proof of

our resources and highly skilled labour.

Whether joining a family business or thinking of retiring from one, it is

important to consider the future plan for your business. If you haven’t

already done so, you need to consider drawing up a plan whether it

is in the form of a shareholders’ agreement, a family charter or family

constitution.

Not every question is appropriate for every family or family business

but this article should highlight some of the main issues to consider.

Have you thought about external investment, would you ever consider

selling the business, what is your retirement plan, what investment is

required for your growth targets in the short, medium and long term

and can the required investment be sourced from family members,

what are the core values of the family business and are there any

aggravating external factors (e.g. Brexit)?

Ownership of the family business can give rise to expensive legal

wrangling if it isn’t dealt with in a transparent way from the outset or

prior to any changes including life changes e.g. death or marriage.

The shareholders’ agreement (or family charter/constitution) should

clearly set out who should own the shares of the business, who should

have voting control, whether a number of voting should be restricted

so that decisions can be reached more easily, who inherits shares and

what would happen if a family member wishes to sell their shares. Any

agreement should also clearly set out how the share price should be

calculated.

If you are the principal majority owner (e.g. a founder) it is important to

think about how you view your shares, are they a capital investment or

an asset passed to the next generation?

Your lawyer should work with the family to draw up an agreement

which addresses all of these issues and clearly sets out the future

strategy of the family business. In our experience these discussions

also help draw out the worries of individual family members and can

neutralise potential disputes from an early stage. For example, what is

the criteria for employing family members? One of the most common

problems is the perception that one family member isn’t pulling their

weight in the family business. Ensure that an employment contract is

put in place, set and monitor targets to manage an underperforming

family member and decide who approves increases in renumeration.

Perhaps family members should be obliged to retire at a certain age

when enthusiasm and commitment is waning?

Ensure that your lawyer also reviews your Will when drafting the

shareholders’ agreement. Your lawyer should also provide for cross

options within the shareholders’ agreement. This means that on the

death of a shareholder, the other shareholders have an option to

buy the deceased’s shares from their personal representatives. An

insurance policy can be taken out on the life of each shareholder.

One particular area of dispute that arises time and time again is

what information should be shared with family members who are

shareholders but not directors. It is important that these practical issues

are outlined in any agreement. Consider how disputes should be

resolved and put a mediation process in place to minimise legal costs.

These rules also apply neatly to other types of businesses, e.g. friends

setting up in business together or a mixture of family and friends.

Taking expert legal advice early is the key to

minimising damaging family disputes in the

future.

For legal advice please contact

Catherine on 028 9043 4015.

[email protected]

237

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Catherine Cooney

Catherine Cooney is a Partner in Worthingtons Solicitors, Belfast who specialises in corporate, commercial and charity law.