The Dangers of an In-Law Becoming a Shareholder Last Part

By Prof. Enrique Soriano

This is the last part of a series of articles related to in-law entry in the business and eventual ownership of shares either by default or by design and its intended consequences.

When in-laws work and own shares in a family business, it can have a significant impact on the business and family dynamics. Some potential consequences of in-laws owning shares include:

1. Increased complexity of decision-making:In-laws who own shares have a say in the decision-making process of the business, which can add complexity to any decision-making process. It does not matter if the in-law owns 1% or 51%—any disagreement can escalate into conflicts between family members/shareholders.
2. Dilution of family ownership:If in-laws own a significant portion of the shares, it can dilute the ownership and control of the business by the family members who founded and built the business.
3. Risk of conflicts of interest:In-laws who own shares may have their own personal interests that conflict with the best interests of the business or the family. This can create tension and strain relationships between family members.
4. Potential for legal disputes:If there are disagreements or conflicts between family members who own shares, it can lead to legal disputes and costly litigation.
5. Impact on succession planning:In-laws who own shares can complicate the process of succession planning, as they may have different ideas about the future direction of the business and the role of family members in the management and ownership of the business.

In order to address these potential consequences, it’s important for family businesses to reflect on the following questions related to the possibility of in-laws or non-family members working and owning shares in your business.

1. Do you have in-laws working in the family business now?
2. Are you open to the idea of your children’s spouses and their relatives working in the family business?
3. How about giving in-laws share ownership of the family business?
4. With ownership, are you also willing to extend the in-law benefit by allowing them to sit as members of the Board of Directors?

If you really believe that in-laws deserve to be future shareholders, it is absolutely necessary that clear policies and procedures must be in place for in-law employment, share ownership, decision-making, dividend distribution, dispute resolution, succession planning and exit strategies. This can include having a family charter and shareholders’ agreement that outlines the rights and responsibilities of all shareholders, including in-laws, and sets out a process for resolving disputes.

A shareholder agreement is a legal document that outlines the rights, responsibilities, and obligations of shareholders in a company. It is an important tool for managing the relationship between shareholders and ensuring the long-term success of the business (I will discuss in detail the meaning of a shareholder agreement in the succeeding articles). A well-drafted shareholder agreement can help prevent disputes among shareholders and provide a framework for the successful operation of the business. It is recommended that companies seek the advice of legal and financial professionals when drafting a shareholder agreement to ensure that it meets their specific needs and objectives. It can also be helpful to have an independent board of directors or advisory board to provide objective advice and oversight of the business to boost the enforcement of the shareholder agreement.

For senior leaders contemplating succession in the next 3 to 5 years, there is another critical task to ensure business continuity happens: updating your estate planning documents that reflect your true wishes for the future of the business. This can include establishing a trust or other entity to hold the business, defining how ownership will be transferred to future generations, and establishing a plan for managing conflicts or disagreements.

In conclusion, the consequences of in-laws owning shares in a family business can be significant and complex, but by formulating a family charter and setting standards related to ownership, the family can be assured that the long-term success of the business and the health of relationships among family members will be safeguarded through generations.