Shareholders by blood, not by trade: managing the coexistence of active and passive shareholders

The active shareholder sees the company from the inside. He knows the customers, bears the risks on a daily basis, and often considers the value created since taking over to be largely his own. He wants to reinvest, retain cash, and make quick decisions.

The passive shareholder reviews the annual financial statements once a year. Their assets are tied up in a company they do not control, whose shares are difficult to sell and which pays out little in dividends. What they want is a return on their shares, regular information and, for some, a way out at some point.

Both views are legitimate. Tension starts when each side judges the other by its own standards.

In almost every family we work with, the same three issues come up almost every time.

Executive compensation. Set it too low and the family member running the company feels exploited. Set it too high and the others see a disguised dividend that only one person collects.

Dividend policy. Reinvesting every euro of profit may be the right call for the business. For the shareholders who never see any of it, it is also an understandable source of frustration.

Disclosure. A shareholder who finds out about a major decision at the general meeting, or worse, in the press, stops trusting the people in charge. Once trust goes, conflict is rarely far behind.

The key often lies in treating three dimensions separately—dimensions that families tend to conflate: what one does, what one decides, and what one owns.

Work is compensated at its fair value.

When the family executive’s salary is set openly and benchmarked against the market, it stops being a source of suspicion. It is fair for the active shareholder to share in the company’s performance. A bonus based on objective criteria does that far better than a yearly argument about dividends, which is a separate question.

The structure of corporate governance can be tailored to specific needs. Corporate law today offers great flexibility, particularly in limited liability companies (SRLs): non-voting shares, shares with multiple voting rights, and shares with preferred dividends. Voting and economic rights can then follow the reality of the family business. Nobody should be favored. The aim is to give each shareholder a say and a share that match the role they actually play.

Value must be able to circulate. A passive shareholder who cannot sell to an outsider and cannot be bought out by the family ends up feeling trapped. A shareholders’ agreement or family charter that provides for a right of first refusal, a valuation method agreed upon in advance, and a timeline (even if only indicative) is an essential safeguard to prevent an exit from being negotiated under pressure or in court.

Before tensions surface, every family in this situation should be able to answer these questions:

• What is the compensation for family members who work in the business, and who sets it?
• What percentage of profits is distributed annually?
• What information does each shareholder receive, and how often?
• Is the intention to provide liquidity to shareholders? If so, under what conditions and within what timeframe?
• What mechanism should be used in the event of a disagreement?

Family shareholders did not chooseeach other. That is exactly why the rules have to be clear. Fair does not mean identical: each person should be treated according to the role they play.

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At deminor NXT, we assist family-owned companies in structuring their shareholding, drafting shareholder agreements and family charters, and valuing shares.

Please feel free to contact us.