Family-owned Business: How A Shareholders Agreement Can Help You Navigate Disputes And Ensure Longevity

Family-Owned Businesses (FOBs) form a significant part of the economy’s backbone and contribute substantially to the GDP. Most big businesses today started off as family-owned businesses, and many still remain so. They indeed constitute the world’s oldest and most dominant form of business organizations — both internationally and here in Kenya. From the famous Walmart; to Ford Motor Company; to Reliance Industries — just to mention a few. Here locally, most homegrown enterprises, from your local hardware shop to famous retail chains, started off as family-owned businesses and continue to thrive as such. Internationally, FOBs are reported to account for 70% of the global GDP and 60% of global employment. Internationally, FOBs are reported to account for 70% of the global GDP and 60% of global employment.

The popularity of FOBs can be attributed to the inherent strengths of family businesses which give them an edge over non-family-owned businesses. Due to the close connection the owners have to the business, there is a high commitment level and dedication. The members are willing to work harder and reinvest profits into the business for long-term growth, with the goal of accumulating and handing over wealth, legacy, and a livelihood to future generations. Additionally, there is the prestige that comes with the family name, reputation and pride associated with the business. FOBs leverage on the close family ties which forge ownership and identity that allows them to remain resilient regardless of the economic realities.

However, family-owned businesses are not immune to conflict. A striking example of this is the recent dispute within City Developments Limited (CDL), a $11.5 billion empire. The family feud between Sherman Kwek, the CEO, and his father, Kwek Leng Beng, the Executive Chairman, has escalated into a bitter legal battle. Sherman is accused by his father of trying to seize control of the company — a charge Sherman vehemently denies. On the local front, the ongoing legal battle at Ranalo Foods Limited, one of Nairobi’s most iconic restaurants, serves as another example of how disputes among family members can lead to significant legal complications. The case, now before the Commercial Court, revolves around ownership, management, and control of the business, with William Osewe Guda and his former wife, Anne Mutheu, each holding 50% of the company's shares and directorship.

In this article, we will reveal how you can navigate such disputes and provide a tool to protect your family business, drawing lessons from the CDL and Ranalo Foods Limited dramas.

Navigating Disputes in FOBs

As with any other business structure, differences in opinion — and consequently, conflicts — can arise in family-owned businesses. Because of the underlying familial ties and the relationships, such conflicts, if not handled or navigated well, may lead to destruction of the family relationships and even the winding up of businesses.

Recently in the media, we have witnessed a power struggle between family members in the $11.5 Billion Empire that is City Developments Limited (CDL). Sherman Kwek, the CEO, has been locked in a bitter feud with his father, Kwek Leng Beng, the Executive Chairman. Sherman stands accused by his father of attempting to seize control of the company from his father—a charge Sherman fiercely denies. This clash has spiraled into a full-blown legal battle, with both sides hiring top lawyers to safeguard their interests and stakes. This is costly to both sides. Unfortunately, this scenario is not unique. We have seen similar disputes in local businesses here in Kenya, some of which have led to insolvency due to unresolved family conflicts.

Further, when such conflicts arise, there is a real risk of:

· Disrupted business operations: Uncertainty over who has the authority to make key decisions, including appointments, investments, or business strategies.

· Legal disputes: When disagreements arise, shareholders may be forced into costly and prolonged litigation, which could have been avoided with an effective dispute resolution mechanism.

· Loss of value: Conflicts within the boardroom, especially those involving family members, can negatively impact the company’s stock value, as investors may lose confidence in the company’s ability to operate smoothly.

For a family-owned business to succeed, it must be treated as a business. Meaning structures must be put in place and respected. But at the same time, the family relationships cannot be ignored or sacrificed at the altar of professionalism. The structures must recognize and provide for those relationships as well as provide for the arising complexities. One of the structural tools that can be used to achieve this is a Shareholders Agreement.

What Is a Shareholder Agreement?

A shareholder agreement is a legally binding contract between the shareholders of a company, setting out the rights, obligations, and duties of each shareholder. It is a constitutive document governing the relationships between shareholders as between themselves and the company as well as its directors. It goes a step further beyond the Articles of Association (which provides the general rules on how the business will be run) to ensure the more peculiar aspects and complexities of the business are catered for.

It is also distinguished from a Family Constitution, which reads more like an aspirational document. The Shareholder’s Agreement is at its core a contract and can be enforced as such, unlike a Family Constitution which consists of the dictates of the patriarch and details the mission and vision of the family.

A well-drafted shareholder agreement provides clarity on:

1. Voting rights and decision-making processes: How major decisions, such as leadership changes or financial matters, are handled. What is the threshold for a decision to be made — is it 50% (simple majority)?; is it 75% (special majority)?; or is it 90% (super majority)?

2. Shareholder roles and responsibilities: Defining the scope of each shareholder's involvement in the business.

3. Dispute resolution mechanisms: Outlining procedures to resolve conflicts without resorting to costly litigation.

4. Exit strategies and succession planning: Detailing what happens if a shareholder wishes to exit the business or if there is a need for leadership transition.

5. Protection of minority shareholders: Ensuring the interests of minority shareholders are protected against the majority’s influence.

Without a shareholder agreement, as seen in CDL, these key aspects of governance are left open to interpretation, leading to disputes and, in extreme cases, boardroom battles that can threaten the company’s future.

How a Shareholder Agreement Can Protect Your Business

A well-drafted shareholder agreement is an essential safeguard against the issues witnessed in the CDL case. Here are some key legal benefits that a shareholder agreement provides:

1. Clear Governance Structure

A shareholder agreement establishes a clear governance framework, specifying the rights, duties, and powers of each shareholder. In the CDL case, had such an agreement been in place, the roles of Sherman and his father would have been more clearly defined, reducing the likelihood of disputes over leadership and control.

2. Dispute Resolution Mechanisms

The agreement can include arbitration or mediation clauses, ensuring that conflicts are resolved efficiently without escalating into public legal battles. By specifying how disagreements should be handled, businesses can prevent prolonged legal disputes that harm both the company’s reputation and financial standing.

3. Succession Planning

A shareholder agreement outlines how leadership transitions should occur, whether due to retirement, sale, or a dispute. In CDL’s case, a proper succession plan would have helped avoid the power struggle between father and son, allowing for a smoother transition of leadership.

4. Protection for Minority Shareholders

A well-drafted agreement ensures that minority shareholders are protected and that their interests are not overridden by the majority. This is especially important in family-owned businesses or companies where control is concentrated among a few shareholders.

5. Exit Strategies

A shareholder agreement should include exit strategies in the event that a shareholder wishes to sell their shares or leave the business. It ensures that the process is fair and transparent, and it helps prevent the kind of disruption seen in the CDL case.

Conclusion: Why Your Business Needs a Shareholder Agreement

The CDL boardroom battle and the Ranalo Foods Limited saga both highlight the critical importance of having a shareholder agreement in place. Whether you're running a family business or a corporate giant, a shareholder’s agreement is essential to ensure clear governance, protect shareholder interests, and provide mechanisms for resolving disputes before they spiral out of control.

How We Can Help

At CM Advocates, we understand the complex legal landscape businesses navigate. Whether you’re setting up a new Family Business or restructuring an existing one, our legal team can help you draft a comprehensive shareholder agreement that will provide clarity, reduce risk, and protect your business interests.

In addition to preparing Shareholders Agreements, we also specialize in advising family-owned businesses in the following areas:

· Preparing Family Constitutions to guide the family’s vision and mission while maintaining family harmony;

· Structuring family-owned businesses to balance ownership, control, and professional management;

· Drafting tailor-made employment policies which cater for the terms of employment and service of family members within the business.

Reach out to us today and ensure your company is built on a strong legal foundation. Visit our offices or explore our services online at cmadvocates.com.For any queries or clarifications please contact the contributors through the emails below or the team through commercial@cmadvocates.com

Contributors: 

Victorine Rotich 

Brian Thuranira