Family Business Shareholders Agreements Part III – Restrictions on Transfer of Shares

It is important for most family businesses that restrictions on the transfer or sale of share be placed on the shareholders.  Complications brought about by different groups within the family can make this portion of the shareholders agreement more complicated than in most private businesses.  Examples of some of the questions that arise when putting together these agreements include deciding if in-laws can be shareholders in the company and if family shareholders are required to work in the business.  Often these types of decisions will be based upon the business philosophy of the company.  There are many options to consider when deciding how shares can be transferred or sold including many options which are driven by tax efficiency.  While tax efficiency is important it must be combined with the company’s business  philosophy if it is to meet the needs and wishes of the owners.

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There are three common sale or transfer of shares scenarios that are usually dealt with in a shareholders agreement:

  1. Sale by one family member:  Most family businesses will have to decide if they want  the transfer to be restricted so that shares cannot be sold to a non-family member and/or whether the existing family members will have a right of first refusal.
  2. Sale of an entire business by all family members: The sale of the entire business usually requires a very high voting threshold or can even require unanimous approval.  If unanimous approval is required a family member with a very small stake in the business could prevent the sale of the business from occurring.
  3. Force buy/sell or shot gun:  A shot gun clause is usually structured so that if one of the shareholders wants to exercise the shot gun they need to make an offer to purchase the other shareholder(s) out at a purchase price and terms of their choosing.  The shareholder(s) receiving the offer has two options.  They can either accept the offer or buy the other shareholder out on the same terms.  A shot gun is an extremely harsh provision which can be abused by a shareholder with deeper pockets.  However, if a dispute is insurmountable it does provide a mechanism to resolve the conflict.

Lawrence Silber