Global HealthcareHealth carePolicy & Law

Shareholders’ Agreement Benefits for Family-Owned Healthcare Firms

5 Mins read
  • Family-owned healthcare businesses may need a more detailed shareholder agreement to resolve confusion and other issues.

There are a lot of things that you have to think about when you run a family-owned healthcare organization. Whether you are a father and son that are both dentists or a family that started a new holistic healthcare products company, you have to make sure that you are able to compete against larger organizations.

There are a lot of nuances that come into play with running a family-owned healthcare company. You probably spend so much of your time thinking about marketing and competing against much larger healthcare companies. One of the lesser known aspects of healthcare entrepreneurship that gets less discussion include formulating a shareholder agreement.

Challenges of Running a Family-Owned Healthcare Business

A recent study by the Institute for Family Business (IFB) found that 1,551 registered companies in the United Kingdom have a turnover greater than £500 million. Furthermore, family firms employ 14 million people in the UK. This is nearly 50% of the private sector employment.  These businesses are the “backbone of the economy”, as put by the IFB.

Needless to say, their continued success is vital both for the economy and the people it employs. When you consider that many of these family-owned companies contribute significantly to the delivery healthcare products and services, it becomes clear just how much we rely on them.

You don’t need a solicitor for your shareholders’ agreement

It is a common misconception that you will have to get a solicitor every time you need a legal document for a healthcare business. There are a lot of instances when your healthcare organization doesn’t need a formal agreement that was drafted by a solicitor.

This is also why often people, especially family businesses, choose not to go for a shareholders’ agreement. They either do not realize the importance of having key legal documents in place or are restrained by how much it costs to get the legal documents.

However, you can draw a shareholders’ agreement yourself by starting with a good and thorough template as a basis.

You do not need to worry about not knowing the legal jargon. Instead, consider the issues that shareholders will face. Next, decide what will happen in each case and simply write it down. After that, it becomes relatively simple to incorporate all of that information in your agreement.

What problems can be caused if you do not have a shareholders’ agreement

Shareholders disputes can contribute to the failure of the business. This is truer for family businesses where the number of shareholders increases as the business grows and more generations get involved in running the business. It can also be a real problem for healthcare organizations, due to many of the unique complications that they face. This increases the potential for disputes.

Some of the other common disputes in family businesses are:

  • Sibling rivalries on titles and remuneration
  • Who will take over the business?
  • Shares used by family members as leverage in disputes
  • Outside interference with operations of the business

To ensure the business’s success and protect it from the effects of shareholders disputes, a shareholders agreement must be executed by and between the shareholders.

The shareholders’ agreement needs to put in place a fair relationship within the business. The agreement also needs to provide clarity to the shareholders regarding how the business will operate and establish a structure for all shareholders to adhere to.

What a Shareholders’ agreement will do to help your business

A shareholders’ agreement is vital for the company’s day-to-day operation and invaluable for its future. It will also help resolve disputes between the family members involved in the healthcare company or looking to get involved in its’ affairs.

Empower the shareholders

By default, the Companies Act, 2006 requires the consent of majority shareholders in some circumstances before making certain business changes (such as changing the company’s name, changing its articles of association, or winding up the company when it is not insolvent).

However, the directors are responsible for the day to day management of the company’s affairs. They will scrutinize company activity even more for a healthcare organization, due to the risk of liability, regulatory oversight and other stressful challenges. Further, the Companies Act does not cover some important business decisions (such as mergers and sale of company’s assets).

A shareholders’ agreement can require approval of the shareholders to be obtained for such key strategic decision. This will decrease the chances of disputes in the family regarding the direction of the business. Furthermore, it can prove vital in protecting the family interests when outside investors are needed.

Share transfers

A share transfer provision is highly useful. It can clearly set out which transfers can be permitted and which can’t and provide to whom the shares can be transferred. Often share transfer happens by accident (for instance, when a shareholder dies or upon bankruptcy).

 A share transfer provision in a shareholders agreement can ensure that all shareholders or the majority are direct family members. Further, in case of death or divorce, it can include provisions that ensure that the shares are transferred to the deceased shareholder’s spouse, a member of his family other than his spouse, or allow the company to buy back the shares.

Employment of family members

One of the causes of the failure of family businesses is that often the business cannot grow as fast as the family is growing. More and more family members seek to get involved and work at the company. In other cases, parents might make their children feel obligated to get involved in the business even though they have no interest. This will put the business under strain.

A shareholders agreement can insist on proper training and screening of family members seeking to get employed in the company.

Dispute resolution

In family businesses, it is common for family disputes to spill over and cause issues in the company’s operation. If you have started with a good template, it will contain a multi-tiered cost and time effective method of dispute resolution, preferably without the intervention of the courts. This will protect the business from family disputes spilling over and causing an obstacle in its success.

Minority shareholders

It is quite common in family businesses for the younger generation to be the minority shareholders of the company. In other cases, the business might need outside investors who may want to buy shares in exchange for investment. Regardless of who the minority shareholders are, all shareholders must be treated equally. However, it can be difficult for minority shareholders to do anything if things do not go their way.

However, to keep harmony in the business, a shareholders’ agreement can grant the minority shareholders additional rights that allow them to express their views at the board meetings.

Privacy

Quite a few people choose to forgo executing a shareholders’ agreement, mistakenly believing that it is not really required and the operation details can be included in the articles of association. However, whereas articles of association are a public document (because they have to be filed in the Companies House), a shareholders’ agreement allows you to keep the sensitive information concerning your business private.

After all, you might not want matters such as dividends policy, incentive schemes, and your exit strategy to come into the public domain.

Drag along rights

Succession planning has been one of the major issues faced by family businesses. It is a difficult topic to bring up. You could be facing a situation where you do not have a succession plan and receive a good offer for selling the business. In such a case, a “drag along” right would enable you to sell the business without worrying about compelling every minority shareholder.

Dividends policy

Your company’s dividend policy needs to be clearly devised for a harmonious relationship between the shareholders. It should not affect the cash reserves of the company. On the other hand, and at the same time, you also need to consider what other family members (especially those who are not employed by the business) expectations and needs are.

You will have to balance these two aspects and record it in a shareholders’ agreement. Not only will it protect the business from cash flow issues, but it will also limit disputes that could arise.

Family-Owned Healthcare Organizations May Need the Right Shareholder Agreement

As a family-owned healthcare organization, your business is going to have to deal with a number of challenges. You are going to have to make sure that you and your co-owners are on the same page and able to deal with potential adversity. A shareholder agreement could go a long towards resolving them.

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