The potential for conflict in a family business can be significant and when disputes between family business partners do arise they can often be the most acrimonious and difficult to resolve.

So, whilst everyone is together over the festive period, it is an ideal opportunity to take some time to agree and document the family business’ roles, structure, policies and procedures in order to solve a variety of potential conflicts before they have the opportunity to develop into bitter disputes.

The two most common forms of governance documents for family businesses are shareholders’ agreements and family charters. There are a number of factors which will influence your choice of document and these are discussed below.

What is a shareholders’ agreement?

Shareholders’ agreements are agreements between the shareholders of a company which govern how the company should be run. They are separate to the company’s articles of association and so are not available to the public. Importantly, they are also (usually) legally binding.

Examples of issues that can be addressed in a shareholders’ agreement are as follows:

  • Board – who is entitled to be on the board of directors? Are certain family members entitled to make certain appointments to the board? Should the board meet up from time to time to discuss the business (and not just over the festive period!)?
  • Shareholders – who is entitled to own shares in the company? Should there be restrictions on persons to whom shares can be transferred? Who is entitled to vote on shareholder resolutions?
  • Valuation – how are shares to be valued in the event of an exit by one of the shareholders?
  • Dividends – what is the company’s dividends policy? When are dividends payable?
  • Consents to key decisions – who needs to consent to certain types of key decisions (whether operational or constitutional)?
  • Disputes – how will disputes be handled going forward? For example, will all parties agree to be bound by the decision of an arbitrator?

What is a family charter and how does it differ to a shareholders’ agreement?

Family charters (also known as family constitutions or family protocols) are agreements between family members which relate to a family business. Again, they are separate to the articles of association meaning that they are private documents.

The main difference to a shareholders’ agreement is that, usually, a family charter is not legally binding at all or is only partly legally binding. That is often because the very nature of the provisions in a charter are not capable of forming legally binding obligations. For example, a common provision found in a family charter is a list of the family’s long-term business goals. In some senses, family charters are comparable to mission statements.

If there are external investors in the company who are not family members, they would not be a party to the family charter. Conversely, there may be parties to the charter who are not shareholders of the company but are, for example, beneficiaries of a family trust that holds shares in the company.

However, although there are differences between shareholders’ agreements and family charters, it is also possible that some aspects of a family charter could also be found in a shareholders’ agreement, for example, an agreed policy relating to dividends.

Next steps

Whether you decide to opt for a legally binding shareholders’ agreement or a non-binding family charter, having some form of document in place containing a pre-determined framework which covers specific situations where conflict may otherwise arise can be vital for family businesses.