Here’s an interesting topic for a family discussion. Some families limit ownership to bloodline descendants of a founder, while others want spouses to be included as owners. What are the arguments on each side?

In favour of spouses becoming shareholders

  • The shares could help provide financial security for a spouse and his or her nuclear family, especially where the shares represent a significant part of that family’s wealth and income,
  • Allowing spouses to own shares communicates a strong signal about spouses being part of the family and the business.
  • The alternative is that spouses might feel excluded, which could dilute the “glue” that bonds the family to each other and to their shared investment in the business.
  • Spouses are parents of the next generation and if they are shareholders they are more likely to pass on positive messages about the business to their children.
  • In the event of marital separation or divorce from a family member, rules can be put in place to provide that any shares held by a spouse should automatically be gifted back to the bloodline family member.
  • Permitting the transfer of shares to spouses opens up options for more tax efficient planning in respect of income and capital.

Against permitting spouses to become owners

  • The shares might provide a relatively modest income return.
  • In a private company there will usually be limited opportunity to sell shares
  • There are alternative ways to protect the financial security of spouses in the event of the death of a bloodline shareholder, for example life insurance.
  • Transfers to spouses leads to further fragmentation and dilution of ownership and more minority interests to be managed by the Company.
  • Too many spouses owning shares would dilute the sense of “familiness” rather than strengthen it.
  • The feelings of inclusion could be addressed through spouses being involved in other aspects of overall governance, for example in a Family Assembly.
  • It would open up the prospect of a significant amount of wealth and power being transferred outside of bloodline family.
  • Tension may be caused if some shareholders transferred shares to their spouses, while others did not.
  • In the event of marital breakdown there will always be scope for a dispute over the valuation of shares and the provisions requiring automatic transfer back to bloodline shareholders.

The other thing families need to consider is who is a spouse? Some families permit transfer to a spouse only after a period of marriage. There is also the need to decide what the family feels about transfer to unmarried partners or to civil partners.

The choice between bloodline or spouses will affect the constitution of the company. If ownership is restricted to bloodline only, the number of potential purchasers if shares come up for sale will be more limited than if spouses were included. Also if ownership is to be kept in the bloodline, the personal wills of shareholders must not contain any bequest of shares in favour of a spouse. If this is overlooked it can result in a distressing conflict between a deceased’s will leaving shares to a spouse and the company’s constitution prohibiting this transfer from being registered.

It is important that enterprising families are aware of the pros and cons of the different models of ownership. The family needs to decide where it stands so that they have the owners they want and that the rules governing ownership are right for their family and their business.

 

The information and any illustrations and models contained are the copyright of Withers Consultancy Group LLP and Withers Consulting Group LLC. If you would like to reproduce any of them please contact WCG at info@withersconsulting.com or by phone on +44 (0)20 7597 6850.

©2013: Withers Consultancy Group LLP and Withers Consulting Group LLC