Key Themes
- Why shareholders’ agreements are essential for family-owned companies
- Key clauses: voting agreements, board succession, exit restrictions, ROFR, Tag-along, Drag-along
- Ensuring continuity across generations through Deeds of Adherence
- Special considerations for IPO-bound family businesses
Why Family Businesses Need a Shareholders’ Agreement
A family-owned company is, in essence, a joint venture between members of the same family. A shareholders’ agreement (SHA) is a legally enforceable agreement between shareholders and their company governing rights and obligations. In family businesses, the SHA has considerations extending far beyond typical joint venture agreements — it addresses governance, succession, and the preservation of family unity.
The foundational thought process: what major areas can lead to a dispute which we can avoid by clarifying today?
Key Areas a Family SHA Should Address
Decision-making rights: What key matters require consent from all family shareholders? Issues like going for an IPO, taking on significant debt, or changing the CEO should not be controlled solely by a majority faction.
Board succession: Who succeeds the founder on the Board? This can follow a merit-based eligibility criterion or a direct nomination approach, but it must be clearly articulated.
Exit restrictions: Can the next generation sell their stake to anyone? Many families prefer lock-in provisions post-demise of the founder, combined with Right of First Refusal (ROFR), Right of First Offer (ROFO), Drag-along and Tag-along rights.
Continuity mechanism: To ensure the SHA survives generational transitions, a Deed of Adherence should be signed by any person who acquires shares, binding them to the SHA’s terms.
Entrenchment in Articles: Critical SHA terms should be incorporated into the Articles of Association, potentially with entrenchment clauses requiring 100% shareholder consent to amend, rather than the standard 3/4th majority.
IPO Considerations
For family businesses pursuing an IPO, the SHA should specifically address Minimum Promoter Contribution (MPC) allocation among family members, who offers how much shareholding for sale, and confidentiality concerns — since SHA details must be disclosed in the prospectus and filed with stock exchanges and SEBI.