Write Before the Fight (Part 9)

Ahmed Wala, elder brother seemed worried that day when he messaged Amna requesting her to spare some time over the weekend and talk with him. Considering the fact that Ahmed usually doesn’t contact her during her studies, Amna contacted her brother immediately over the weekend.

Ahmed shared his concern by referring to an example of one of his close friends, Babar, who recently faced a financial loss in his family business. Babar is a chemical engineer by profession but he has been running his father’s petrochemical business for a few years. He was the key person in his firm – his siblings were sleeping partners. But recently it has been heard that he is out of the business because his elder brother acquired the whole entity, and the rest of the family members are left empty-handed.

Amna understood her brother’s concern as he is the person responsible for running their father’s business - there is a possibility of Ahmed facing the same situation as his friend Babar. He didn’t want to say these words but the reason to share with Amna was to consider coming up with a solution through documentation as she was consistently discussing professionalizing family business with all the family members.

Shareholder Agreement

Addressing the concern raised by her brother Ahmed, Amna conducted some research and identified details to be added in the Shareholder agreement – which will provide a framework for the protection of shareholder’s ownership interests. Listed below are a few important benefits of the shareholder agreement.

·         Definition of the control of family business ownership

·         Composition of the Board

·         Voting Rights

·         Threshold criteria for the major decisions, for example, liquidation, ownership transfer, dividend policy, etc.

·         Confidentiality clauses

·         Dispute resolution policies can be spelt out

·         Exit mechanism and its valuation methodology are prepared in advance

Buy Sell Agreement which at times is used interchangeably with Shareholder Agreement, has components defined in the Shareholder Agreement.

Although creating these agreements can be challenging because of the different objectives among the family members. But to facilitate long-term succession planning to the next generation such agreements assist in the maximization of share value and allow shares to be transferred more easily. Family business owners should understand the importance of creating such shareholder agreement as this contract that is binding for their ownership interests and can have long-term implications. Amna shared this article of the family literacy series which she was writing with her brother Ahmed first and then with the other family members. Ahmed read and realized the importance of written documents for family-owned businesses' longevity.