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Family Member Shareholding Policies

Provided by IFC Corporate Governance


For some families it is crucial to clearly define shareholding policies at the earliest stages of the family’s business's existence. This usually helps set the right expectations among family members regarding shares’ ownership rights, e.g., whether in-laws and other related family members are allowed to own shares or not. A good shareholding policy would also define the mechanisms that allow family members to sell their shares if they prefer cash instead. Indeed, as the shareholders’ pool grows larger, most shareholders will end up with a smaller percentage of the company’s shares that would yield lower dividends (if the company is paying dividends at all). This situation can create frustration among these minority shareholders and lead to conflicts with salary receiving family members.

Providing the shareholders with a liquidity option for their shares could help avoid many conflicts and increase the business’ chances of survival. Some family businesses establish a Shares’ Redemption Fund in order to buy back any shares that family members would like to liquidate. The Fund is usually financed by contributing a small percentage of profits to it every year.

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