Soriano: Crafting solid agreements: your most important step (part 2)

ACCORDING to the family business firm Lansberg and Gersick, governance is concerned with all of the ways that the interests of owners are reflected and implemented in the organizational system. It is inherently about institutionalizing control.

A business first model

Working family members must realize that in business, there are targets to be made, budgets to stick to, profits to raise, deadlines to be met, a network of people to deal with, and a lot more responsibilities that need to be taken according to corporate standards.

Unfortunately, these could not be delivered if the members of the family are not on the same page, not in agreement with what is expected of them, and unaware of how their expectations would have to be limited for the good of the family business. They could be just all over the place and doing whatever they want without considering the resources and proper procedure. This is why formalizing agreements becomes an indispensable tool to institutionalize governance.

Shareholders’ agreement

Apart from the family charter or constitution, I will start with one of the most important formal agreements family business owners must document and put in writing to avoid a future, irreparable and unnecessary conflict among family members.

This agreement is sometimes referred to as an owners’ agreement but in the Philippines, we use the term shareholders’ agreement. As the word implies, this agreement highlights the need to align ownership and board level governance, as it makes known to all who are concerned about ownership. It also includes the governing aspects of their relationship not covered in the articles of incorporation. It is also an agreement that crystallizes ownership rules to suit the particular requirements of the company and its shareholders.

Another important element of the shareholders agreement also defines the qualifications of being an owner and the description of particular events that could be reasons for transfer of ownership.

In short, some questions listed below can be resolved in the shareholders’ agreement:

What will trigger a transfer of ownership?

Who can own shares?

How should an ownership position be valued?

What are the terms of the purchase?

When can I sell my shares?

To whom can I sell my shares?

I can go on and on but what is crucial is for family members to start the process of formalizing ownership and board governance policies through a shareholders agreement before it’s too late!

Why do we need one?

A common question that I usually encounter among family business leaders is, “We have no major quarrel in the family, therefore, why do we need one?”

The answer is quite clear! For as long as the family head is in full control then ownership issues are “muted”. Family members do not openly talk or assert ownership concerns while the senior business leader is still on top. It is the family members’ way of avoiding a very sensitive topic while showing respect to the senior generation members.

But what if all of a sudden the senior family member or the head of the family falls ill, or is crippled or suffers a debilitating disease and dies? Almost instantaneously, the business itself may die or be permanently disabled on the same day, not because something wrong was done, but because nothing was done!
Compelling reasons to start now

There are many reasons why every family business must formalize ownership structures. I can highlight the top three:

To avoid future disputes by defining the relationships between and among shareholders;

Anticipating the issues which could cause disputes; and

Agreeing on acceptable ways of dealing with them.

As a guide to the readers, I have also listed below a number of issues commonly covered in the agreement:

Shareholders, classes of shares and shareholdings;

Governance in the board of directors and top management level;

Funding of the company and shareholder’s loans;

Transfer and restriction of shares; and

Valuation of shares.

A shareholders’ agreement is one form of governance agreement that is both normative and legally enforceable. Therefore, it would be best to look for a tax lawyer or a tax specialist with extensive experience in ownership transfers employing tax efficient methods. A corporate lawyer can also be a good reinforcement to make the agreement legally binding.

(sorianoasia@gmail.com)

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I will be in Cebu on July 25 (Saturday) to deliver a talk entitled “Creating Growth Opportunities for Family-Owned Enterprises”. The venue will be at the Choi City Seafood Restaurant in Banilad Town Centre. This timely one-day Franchise and Marketing Seminar is organized by the Octopus Strategic Branding Group. Those interested to attend, please call Mr. Danny Wong at 0917-8900063.

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