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November 14, 2017

THE PRINCIPLES BEHIND EFFECTIVE AGREEMENTS

JEFF NOBLE, DIRECTOR, BUSINESS TRANSITION SERVICES

CAROLINE ABELA, PARTNER, WEIRFOULDS LLP

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WHY IS A SHAREHOLDER AGREEMENT IMPORTANT? To enable good governance

Good Governance

Decision-Making

Participating Problem-solving Openness/inclusiveness Consensus oriented

Implementation

Transparency Policies/Procedures Adherence to Rules Accountability

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BENEFITS OF A PRINCIPLES-BASED AGREEMENT

Enhances the communication

Gets clarity around key principles and philosophies

Ensures clarity around ownership and compensation

Protects the investment

Leads to an agreement that people are willing to sign!

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THE ISSUE

80% of Shareholder Agreements are never signed

No communication or “we focus” approach

Many create golden handcuffs

Many are a recipe for legal battles

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THE PROCESS

1. Key Components of Effective Agreements

2. Foundation of Effective Agreements

3. Developing the Agreement

4. Test the Model

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KEY COMPONENTS OF EFFECTIVE AGREEMENTS

ENTRANCE

Incoming shareholders need to know the purchase price is fair and be able to link it to their return

on investment and eventual sale of shares.

COMPENSATION

Shareholders need to feel they are receiving market value for the role they play separate from

their return on investment.

RETURN ON INVESTMENT

The ROI should be measurable against the value of the investment and shareholders should realize a

reasonable return on equity.

EXIT

Outgoing shareholders need to receive a fair value while ensuring that the payments are affordable

to the remaining shareholders.

GOVERNANCE

Decision-Making

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THE PROCESS




4. Test the Model

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CLARITY AROUND YOUR FAMILY BUSINESS PHILOSOPHY

Who you are and what you stand for?

What type of legacy you want to leave your family?

How the business can enable that legacy

What are the policies for participation?

Family Vision

Family Participation Plan

Family Charter

Family Council

Wealth Preservation

Shareholder Agreement

Ownership Plan

Advisory Board

Business Success

Diversified Business Plan

Advisory Board

ARAs

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WHAT IS YOUR PHILOSOPHY?

Personal/Family

Financial Independence

Individuality

Family connectedness

Ownership

Ongoing Investment

Fair and affordable entrance

Fair exit process

Management

Participation

Compensation

Mentoring

Decision-making

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PHILOSOPHY IS FOUNDATION OF GOVERNANCE POLICIES

Family Charter

Philosophy and Guidelines

Family Participation Plan

Policies and Procedures

Family Council

Communication

Problem-Solving

Decision-Making

Management Board

Communication

Problem-Solving

Decision-Making

Ownership Board

Communication

Problem-Solving

Decision-Making

The Family Business Senate

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WHAT IS A FAMILY CHARTER?

A roadmap or guidebook for the family unit:

Outlines who the family is and what they stand for

• Sets out their values and principles

Maps out what they want for the family over the next 1000 months (the 100-year plan)

• Family vision and mission

• Plan for continuity of the family business

Outlines the responsibilities members have

towards each other

• Ethics policy

• Respect, empathy and support

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WHAT IS A FAMILY CHARTER?

Records the family’s:

1. Guiding Principles and Values

2. Vision and Mission statements

3. Ethics Policy

4. Celebrations and Traditions

5. Philanthropy

6. Management Philosophy

7. Ownership Philosophy

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WHAT IS A FAMILY PARTICIPATION PLAN?

A roadmap or guidebook around the involvement of family members and

extended family in the business

•Who gets to be an owner?

•How do the new owners pay for their interest?

•How do they exit again?

1. Eligibility of Ownership

•Criteria for working in the business

•How roles are determined

•How compensation is determined

•The hiring process

•Mentoring and continued personal development plans

•How performance is evaluated

•Responsibilities around confidentiality, dealing with suppliers who are family members, employment with competitors

2. Policies for Involvement in the Operation

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THE PROCESS




4. Test the Model

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DEVELOPING THE AGREEMENT

Shareholders and trusted advisors (including lawyer) meet to discuss family business

philosophy and what is important around:

• Wealth protection and preservation

• Future ownership and leadership

• Financial independence

• Asset distribution

• Business reinvestment

Step 1

This can include either just the parents or the entire family

• Tax management

• Company mission

• Compensation philosophy

• Decision-making philosophy

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From the family business philosophy, extract key “policies” that majority shareholders

feel are required for the agreement

• Draft these “policies” as “transition principles”

• Vote on validity of each principle

Step 1 cont’d

This can include either just the parents or the entire family

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If not done in step one, meet with entire family to share draft transition principles:

• Explain the reasoning behind each principle

• Provide clarification where required

• Make necessary adjustments

• Vote on validity of each principle

Step 2

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From the transition principles, the lawyer:

• Develops questions to clarify the family’s criteria for each of the 5 components of a

Shareholder Agreement

• Poses these questions to the family

• Drafts the Shareholder Agreement based on the family’s responses to the questions

Step 3

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Lawyer presents draft Agreement and:

• Relates sections of document back to agreed-upon transition principles and shows how

the document:

– Incorporates all transition principles

– Includes a Stock Market to prevent golden handcuffs

– Facilitates the Entrance / Exit process

• Provides clarification where required

• Makes necessary adjustments

• Oversees signing of agreement

Step 4

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THE PROCESS




4. Test the Model

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CHECK IF THE STOCK MARKET WORKS

Date Action Item Section / Clause in

Agreement

Dec 31 Year End

Feb 28 Audit Financial Statements

Annual Calculation ‘Sale or Distribution of

Shares’

Common Shareholders offer Shares ‘Sale Notice’

Corporation accepts Offer which does not

exceed maximum amount ‘Maximum Amount’

Sale closes ‘Closing Procedures’

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QUESTIONS?

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Jeff Noble

Director & Practice Leader Business Transition Services

[email protected]

Direct: (905) 272-6247

1 City Centre Drive, Suite 1700 Mississauga, Ontario L5B 1M2

Jeff is a senior consultant in the BDO Advisory

Services Practice. With twenty + years of facilitation

and coaching experience, he helps business families,

not-for-profits and other enterprises effectively deal

with the transition from one stage of their business

lifecycle to the next. As a fourth generation who

spent several years working in his family’s firm, he

thoroughly understands the challenges facing

privately-owned businesses, their key stakeholders

and the high net worth families they support.

THANK YOU Caroline Abela

Partner, WeirFoulds LLP

[email protected]

Direct: (416) 947-5068

4100 – 66 Welling Street West Toronto, ON M5K 1B7

Caroline is a partner with the firm and has

been involved in leading business litigation

cases. Focusing on commercial and corporate

litigation Caroline represents clients ranging

from large corporations and institutions to

small business owners and professionals.

Caroline has appeared as counsel before all

levels of courts in Ontario and the Federal

Court of Canada.

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