Bass, Berry & Sims attorney Richard Spore authored an article for Family Business Magazine detailing various types of provisions family business owners should consider in ownership agreements. When formalizing business ownership documentation, family businesses may be tempted to adopt documents that are less robust under the assumption they don’t need a lot of complicated legal documents “because they’re family.” However, contracts are critical only when there are disagreements, which operators in a family business are not immune to. With this in mind, Richard outlines how the following provisions can benefit family business owners:
- Buy-sell agreements that provide that an owner’s interest may be bought upon his or her death, disability, termination of employment or divorce.
- Capital calls provisions that clarify the owners’ obligation to meet capital calls and guarantee company debt.
- Voting trusts to grant certain family members (or non-family managers) the power to vote the ownership interests of other family members.
- Deadlock resolutions to provide a mechanism for ending voting deadlocks on key issues.
- “Tag along” and “drag along” provisions that allow minority owners to “tag along” with majority owners in a sale of a majority interest in the business and majority owners to “drag along” minority owners by requiring them to participate in a sale of all ownership interests in the company.
- Supermajority voting provisions that require certain key decisions to be approved by more than a simple majority vote of ownership.
- Key man insurance to fund buy-sell obligations that are effective upon an owner’s death or disability.
- Alternative dispute resolution (ADR) mechanisms, such as mediation and arbitration, to make it less likely that a family disagreement will end up in a public litigation situation.
The full article, “Are Your Family Business Ownership Documents In Order?” was published on November 23 by Family Business Magazine.
Richard also authored an article for Family Business Magazine offering solutions for challenges faced by family businesses when considering how to distribute profits among family members ranging from passive to highly active in the business. This earlier article, “Sharing your Family Business Profits Fairly,” was published by Family Business Magazine on July 16 and is available online.