The highly-analyzed saga of the Rogers family has taught us more than a few lessons about business succession, family governance—especially when large sums of wealth are involved—and the need to carefully envision the future you want for your family once the main wealth builder passes on. But it’s also a clear lesson in the importance of properly constructed shareholder agreements. Because ensuring financial wellness starts by planning ahead and being prepared.
In the case of the Rogers family, Edward Rogers—son of the company founder Ted Rogers—serves as the head of the family trust that controls 97.5 per cent of Rogers Communications Inc.’s voting shares. Late last year, he declared that it was his right to dispose of the then-current board of directors without a shareholders’ meeting, much to the chagrin of his mother and sisters, who also sit on the board. After a short-lived legal tussle, a B.C. judge ruled that Edward Rogers did, indeed, have that right. The entire episode saw lawyers, corporate rights advocates and business commentators weighing in on the fairness of the situation and what it could all mean for the future of the Rogers empire.
While most business owners will never have a massive telecom to divide amongst their children, the Rogers family drama serves as a reminder that taking the time to consider every potential scenario is the key to getting shareholder agreements right—and not leaving your family with a corporate governance and legal train wreck to untangle after your passing.
While there are scores of issues to consider when structuring a shareholder agreement—which is essentially the rule book that determines how you and your business partners will manage shares and navigate any legal or business issues that may arise—there are a few that are often overlooked.
Proactive tax planning
Tax considerations are a primary concern, because the way a corporation is structured will ultimately determine how it is classified and taxed. Control structures could range from a family trust with dual-class shares such as in the Rogers example, to a situation where unanimous shareholder agreement is required when making major operational decisions—such as replacing the CEO or other C-suite leaders.
How a Canadian-controlled private corporation is managed through a shareholder agreement—and by whom—will determine whether the ownership group can use capital gains exemptions and other tools to mitigate their tax burden. Various clauses in a shareholder agreement such as anti-dilution provisions or triggers around the retirement or death of a shareholder, could also have a significant impact on how the owners are taxed.
Even the way shares are valued for transfer between shareholders can determine the shareholders’ eventual tax liability. For example, if a non-arm’s length transaction occurs—such as a transfer of shares to a family member or to a family member’s corporation, or in some cases even to business partners considered to be non-arm’s length for purposes of the transaction—the share valuation must be at what CRA determines to be fair market value, rather than the valuation set by the shareholders. If not, the shareholders could be subject to double taxation. Stay tuned for much more on the topic of tax planning and shareholder agreements in the months ahead.
There are two other important considerations that are often under-emphasized when developing a corporate shareholder agreement.
Avoiding conflict by defining roles
The first is determining who makes the decisions.
Every business partnership starts amicably, but not every partnership ends that way. A properly-defined dispute management structure and delineated decision-making process will help to mitigate the risk of confrontations derailing your partnership or compromising the company’s success in any way.
Perhaps most importantly, it helps to divide management responsibilities amongst the leadership team. Doing so not only addresses potential sources of conflict, but ensures that leaders each have key areas of oversight to manage, while collaborating with other owners on the general strategic direction for the business.
That succession and decision-making structure must be carefully considered by the founder of the company/primary shareholder. Because as the Rogers example has taught us, even a meticulously-planned strategy can result in conflict once power is divided amongst family members.
Welcoming and saying farewell to shareholders
Second, there needs to be a clear mechanism for partners to enter and exit the business. Share prices for new shareholders must reflect current market values, while there must be a process for determining how shares are managed if a shareholder passes away, becomes disabled or chooses to leave the business. Fair valuation is again critical, along with a buy/sell agreement that spells out a range of scenarios and how they should be handled.
Having key person insurance is one way to hedge against worst-case outcomes. These policies have many benefits, one of the main ones being the way they insure the value of a shareholder’s stake in the business. That allows the remaining partners to fund the buy-out of a deceased or disabled partner’s shares in the business, thereby allowing the original ownership group to retain full control over the business.
Lastly, and it should go without saying, be prepared to invest in experienced and reputable legal, financial planning and accounting advice when drafting a shareholder agreement. These can be highly complex documents that require careful attention to detail. The right advice can help you avoid unnecessary legal risk, boost your wealth and lay the foundation to protect your long-term financial well-being.
The Bridgewell Team
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