Structuring family ownership

What is the issue?

Family businesses face risks to wealth, harmony and succession due to the influence of external shareholders and misaligned decision-making.

What does it mean for me?

With significant family wealth tied to the business, a family should proactively seek to align shareholder decisions with its purpose, vision and intent.

What can I take away?

A comprehensive ownership strategy, aligned with legal tools such as a shareholders’ agreement, assists generational transitions, supports balanced corporate and family governance and preserves family values, protecting legacy and enabling sustainability.

One of the most significant risks to family-owned enterprises is the potential influence of external shareholders. This is particularly relevant given the considerable proportion of wealth often concentrated within a family’s business. As such, any shareholder decision that is not aligned with the family’s long-term interests can jeopardise both the continuity of the business and the financial well-being of the family members who depend on it. To mitigate this risk, families are increasingly developing comprehensive ownership strategies.

What is an ownership strategy?

This strategic document articulates how ownership of the family business should evolve to support key transitional moments, such as:

• Intergenerational wealth transfers;
• The buyback of shares from family members seeking to exit the business or retire; and
• The issuance of equity to external investors to raise additional capital.

An ownership strategy forms a critical component of a family’s broader governance and serves as a cornerstone of succession planning. It provides a structured framework that harmonises the emotional, financial and operational dimensions of ownership across generations.

Specifically, an ownership strategy sets out:

• The long-term vision and purpose of the business;
• The family’s risk appetite and strategic ambitions;
• Mechanisms for succession, including trigger events, shareholder rights and share class distinctions;
• Protocols for share transactions (buy, sell, repurchase); and
• Agreed procedures for managing conflict and contentious ownership issues.

Implementation

Succession and ownership strategy mechanisms are typically activated when a family member who holds shares and is actively involved in the business steps back from their operational role. At this juncture, the individual’s reliance on the business to support their lifestyle invariably shifts. They may either dispose of their shares, thereby realising a lump-sum capital benefit, or retain their shares and continue to receive dividends, albeit often at an adjusted level.

The ownership strategy ensures that rights and responsibilities are appropriately recalibrated during this transition to reflect the individual’s revised role. It allows the family to plan for the event and ensures that all family members are treated fairly. Two principal elements are at play: the change in shareholding interest and the succession of the roles previously undertaken by the individual.

The shareholding interest typically mirrors the individual’s seniority within both the family and the business. The rights and privileges attached to their share class correspondingly reflect this standing. Ordinarily, such shareholders are entitled to a substantial portion of dividends and wield significant influence within the ownership framework. The ownership strategy will evolve alongside the individual’s role. It is not uncommon for a share swap between classes to occur or for the rights and privileges associated with the share class to be modified accordingly.

The succession plan establishes the framework for the orderly transfer of authority, duties and obligations to the succeeding generation. This enables the family to plan proactively for such events and affords potential successors time to prepare for their new responsibilities. It is imperative that the succession plan is reviewed and updated promptly to accommodate the appointment of the rising generation.

Share classes and generational transition

Many family enterprises adopt multiple share classes, often structured along generational lines. These may carry different voting rights or entitlements to income. Adjusting the rights associated with particular share classes is a common method of transferring wealth across generations while maintaining control within key branches of the family.

Raising capital and engaging with external investors

As businesses grow, the need for additional capital may necessitate the introduction of external investors. New equity issuance can help raise funds but often comes with expectations around governance involvement and financial returns.

This shift may require the family to reduce its own income in favour of reinvestment and capital growth. If the business lacks a clearly articulated purpose grounded in the family’s values, the introduction of external shareholders can lead to misalignment with the family’s original objectives.

Here, the ownership strategy is pivotal. It provides a framework for:

• Identifying suitable investors;
• Defining acceptable trade-offs; and
• Establishing boundaries to protect family influence.

Trust structures and ownership

In many family businesses, shares are held wholly or partially through a trust, with remaining equity owned directly by family members. While trust structures can be highly effective for intergenerational wealth transfer, they can introduce additional complexity.

The trustee, the legal owner of the shares, holds them for the benefit of the trust’s beneficiaries. From a family governance perspective, the trustee acts as an external shareholder and is bound by fiduciary duties and the provisions of the trust deed.

Crucially, the trustee is not obligated to follow family values or strategy but must prioritise prudent, objective decision-making in line with their legal and fiduciary responsibilities. This can result in occasional tensions where the trustee’s decisions diverge from family expectations. However, this independence is a strength, ensuring commercial rigour and impartiality.

The shareholders’ agreement

As explained above, the trustee is bound to act within the terms of the trust instrument. To bridge the gap between the family governance framework and corporate governance requirements effectively, the settlor should, at the point of establishing the trust, ensure that the provisions of the trust instrument are consistent with the family governance framework.

There is a need to ensure alignment between the trustee’s shareholder role (a corporate governance function) and the family’s long-term intentions (a family governance function expressed in the ownership strategy). It is therefore advisable to formalise the trustee’s position through a shareholders’ agreement.

This legally binding document:

• Establishes the rights and obligations of all shareholders;
• Anticipates and provides mechanisms for dispute management;
• Ensures that decisions are made in a manner that upholds the family’s overarching purpose and supports its strategic direction;
• Lists the reserved matters where directors have to seek shareholders’ approval; and
• Clarifies decision-making processes and exit procedures.

While the ownership strategy offers guidance on the family’s purpose, values and intentions, the shareholders’ agreement is legally enforceable. It translates that guidance into a legally binding framework.

The shareholders’ agreement enables shareholders, including the trustee, to operate within a framework that reflects and respects the family’s strategic goals. If the trust instrument does not permit the trustee to enter into a shareholders’ agreement or limits its actions, the trustee may need to consider amending the trust instrument and seek legal assistance to do so.

Conclusion

The ownership strategy is an essential tool for ensuring the long-term sustainability and governance of family businesses. It:

• Facilitates robust succession planning;
• Clarifies and manages evolving shareholder roles;
• Balances family influence with commercial realities and investor expectations; and
• Provides clarity for trustees and other non-family shareholders on the intentions of the family.

By acting as a strategic compass, the ownership strategy enables families and shareholders to align around a common purpose: safeguarding the family’s legacy while supporting the long-term success of the enterprise. It bridges the emotional and financial dimensions of ownership, aligning family values with effective governance and strategic direction. Through proactive consideration of key transitions, the ownership strategy equips families with the agility needed to adapt to changing circumstances.

Although trust structures offer a robust means of facilitating intergenerational wealth transfer, they must be carefully designed to avoid potential misalignment with the family governance framework. To ensure continued support for the family’s long-term vision and values, the role of the trustee should be clearly defined and supported through legal instruments such as a shareholders’ agreement.

By formalising family intent through a comprehensive ownership strategy and complementary legal frameworks, families can establish resilient enterprises capable of navigating generational change. This structured approach allows families to retain control, promote unity and uphold their values, ensuring that the family enterprise remains both purposeful and prosperous for generations to come.