Written by Elizabeth Guerra-Stolfa | Rigby Cooke Lawyers
The succession plan for a family business can often be quite complicated, especially where only one or some of the founder’s children work in the business or are interested in the business. Leaving your business interests to only those children who work in the business can cause disenchantment among the children resulting in a potential challenge to the Will. Careful planning is required to implement strategies to mitigate any potential risk of dispute between those you leave behind.
Shareholders’ and unitholders’ agreements are increasingly being implemented for companies or trusts that involve two or more arms’ length parties. There are very good reasons for this trend: such agreements help to guide decision making, establish governance procedures and stipulate mechanisms to resolve deadlocks.
Business owners are increasingly entering into what is commonly called a ‘buy/sell deed’. This is a deed under which the owners of a business entity agree that, if one of the owners dies or becomes permanently disabled, the others have an option to purchase that owner’s equity.
These crucial agreements are often overlooked in the context of succession and family-owned businesses.
For example, a business may have been started by a parent through a company in which he or she holds all the shares. Over the years, all three of their children have become involved in the business. The parent intends for the business to stay in the family and wishes to leave the business to the children in equal proportions. Accordingly, the parent’s Will makes provision for each of the children to receive one-third of the shares upon the parent’s death.
As the parent was the only shareholder until their death, the company has no shareholders’ agreement or buy/sell deed. The company constitution includes the usual provisions allowing a majority of shareholders to appoint directors by ordinary resolution, to control the issue of shares and to control the affairs of the company.
If one of the children falls out with the other two after the death of the parent, the two “majority” children can now effectively exclude the third child from the affairs of the company. They could remove any representation that child had on the board of the company and even seek to dilute the holdings of the third shareholder.
The minority child’s only remedy may be to ask a Court to step in to prevent or rectify any oppression. While a Court will often grant some relief in these circumstances, the nature and extent of the relief to be granted is hard to predict.
If the business is conducted through a company or a unit trust, it’s possible to make the gift of the shares or units under the Will conditional upon the entry into a shareholders’ (or unitholders’) agreement and a buy/sell deed. This would mean that each of the children in the above scenario would be required to execute the agreement and deed before they become entitled to the shares.
The shareholders’ agreement could:
Ensure that each of the children had the right to appoint one director to the board (presumably themselves) even without a majority of votes.
Make certain key business and corporate decisions dependent on a unanimous agreement.
The buy/sell deed could ensure that the shares stay in the family by giving each of the children an option to purchase the shares at market value if one of them dies or becomes incapacitated.
About Elizabeth Guerra-Stolfa
Elizabeth Guerra-Stolfa is an FBA Specialist Accredited Advisor and renowned for her proactive and no-nonsense approach to giving legal advice. She is focused on commercial outcomes but is ever mindful of the emotional complexities of family business disputes. Her practice spans all areas of commercial litigation, including contractual disputes, Consumer Law disputes, retail lease disputes, family business disputes, property litigation and professional negligence claims. As an accredited mediator Elizabeth can and does also guide and advise clients on alternative methods of dispute resolution.
Family Business Australia and New Zealand provides this article for your information only. The content of the article should not be taken as advice. If you wish to explore this topic, please consult an advisor who you consider to have the expertise to provide specific advice in relation to your family business.