The relationship between active and non-active members of a family business need to be carefully managed, particularly when a family business has survived several generations as there are likely to be many family members who have shares in the business and while some may be actively involved in it as employees or directors some won’t be and this has the potential to cause tension. And whether involved or not, in a family business every family member feels some degree of responsibility because the business is often interwoven with the family’s history, future and financial wellbeing.
To ensure harmony between all family shareholders for the benefit of the business, here are a few suggestions:
1 Be practical with voting stock
Where the voting power lies can have a big impact on the smooth running of the business. Problems can arise when all shares have equal voting power and active and non-active shareholders vote different ways on key decisions because of differing priorities, risk tolerance or levels of knowledge. One solution is to have multiple classes of stock which enable certain members of the family to maintain control over the company. For example active members of the family business could be allowed to hold a class of stock with one or more votes per share and a different class of stock with reduced or no voting power can then be held by family members who are not actively involved in the running of the business. This ensures decision making about the business will remain with those most familiar with it, but the economic benefit of the business is still shared evenly throughout the family.
While this can be a practical option, in the name of fairness and equality many families prefer to have one class of share. In this case a solution I know that many families use is for non-active family members who do not feel informed enough about the business to make key voting decisions to appoint an active family member as their proxy. However this can only happen with consent and trust and so only tends to work in well functioning families.
2 Draw up an enforceable shareholders agreement
Whether you have different classes of shares or not, there may still be other issues about control of the company that you need to address. This can be done with an enforceable shareholders agreement. Depending on the issues you want to avoid or resolve, you can include certain stipulations such as restrictions on the appointment and removal of directors and of their remuneration. Another area that may need clarity relates to dividends which for some non-active shareholders may be their sole source of funds.
3 Promote inclusion
Because a family business is often intertwined with the family’s identity it is vitally important for active family members not to dismiss input from non-active family members. While there is the potential for issue where non-active members begin to unduly interfere, in general any contributions and sacrifices made should be acknowledged and appreciated, and ideally remunerated. It is important to remember that even if a family member has chosen not to be actively involved in the business they are still likely to interested in it and would appreciate being included in some way. Therefore, active family members need to take responsibility for communicating updates about the business with non-active family members just as non-active family members should show an interest in the business, offering opinions and advice, but without unduly interfering.
For many families, holding an annual or bi-annual family shareholders meeting serves several purposes:
- it gives everyone an update on how the business is doing and makes them feel included;
- it allows advice or concerns to be heard in a constructive way; and
- it reaffirms positive family relationships which can only be good for the business.
Particularly in the case of large families, it can be difficult to include everyone in the business in a meaningful way but offering opportunities to be heard and promising to listen is something that active members have a responsibility to do and non-actively family members have a responsibility not to take advantage of.