Shareholders Agreements in the Context of an Estate Plan - Part 2 - Hull on Estate and Succession Planning #150
Listen to Shareholders Agreements in the Context of an Estate Plan - Part 2
This week on Hull on Estate and Succession Planning, Ian and Suzana continue their discussion on shareholders agreements in the context of an estate plan. They discuss the fact that when creating a shareholders agreement we should deal with the day to day governance not the global governance which deals with directors and officers.
If you have any comments, send us an email at hullandhull@gmail.com or leave a comment on our blog.
Shareholders’ Agreements in the Context of an Estate Plan - Part 2 - Hull on Estate and Succession Planning #150
Posted on February 5th, 2009 by Hull & Hull LLP
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag. These podcasts will provide information and insights into estate planning in Canada. From the offices of Hull & Hull in Toronto, here are Ian and Suzana.
Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening to Episode 150 of our podcast on Tuesday, February 3rd, 2009.
Ian Hull: Hi Suzana.
Suzana Popovic-Montag: Hi Ian, how are you today?
Ian Hull: I feel terrific, thanks.
Suzana Popovic-Montag: That’s good.
Ian Hull: Please feel free to give us feedback at any time at hullandhull@gmail.com.
Suzana Popovic-Montag: Or feel free to visit our blog which is up daily at estatelaw.hullandhull.com.
Ian Hull: Okay Suzana, so when we left off in our last podcast, we were struggling with some of the corporate concepts and at the same time, we were developing what is really an estate plan with good communication, using the shareholders’ structure as our agenda to force discussion, to force discussion and learning. So that the kids, the next generation, can not just get the wealth, they can understand the wealth.
So let’s talk now, let’s just into where we left off. We had left off with the idea that when we’re creating our shareholders’ agreement, we should in large part deal with the day-to-day governance, not the global governance, not when we talk about ownership and control and growth and all that sort of stuff, the day-to-day governance. And that, of course, deals with directors and officers.
Suzana Popovic-Montag: And Ian, what’s the difference just, you know, in a nutshell between a director and an officer?
Ian Hull: Well I think that’s a good point because I don’t want to over simplify that concept. I mean, when we’re dealing with directors, they are truly not to be dealing with the management of the company. Whereas the officers are to answer for the management. The directors are the overseers of the managers and typically when you get in these closely held family corporations, people don’t make that distinction and it’s important in some respects to add in outside directors to bring some of that governance overseeing capabilities. Because what often happens is the directors feel that they’ve got to deal with the operations and so they sit in meetings talking about operational issues that are really not, they’re the day-to-day management.
Suzana Popovic-Montag: Right.
Ian Hull: So that’s a good point, the distinction is at law clearly the overseeing versus the day-to-day management.
Suzana Popovic-Montag: Right and that’s where we get those titles, like President would be the director; the Vice-President, the Secretary or whatever those formalized roles are, more the officers, the people who do the day-to-day work in the corporation.
Ian Hull: Right, so once we’ve kind of established that we need some sort of overseeing and we need good leadership on the ground. One of the things that the shareholders’ agreement can allow for is sort of an ongoing rolling directors, who is going to sit as a director and so forth and as well as ongoing rolling management as well, if it makes sense. Now it may not make sense. It may be that the President who is the operational head of the company needs to stay there on a consistent basis and so you may not in fact allow for as much flexibility in that. But these are just options. So I think again, its an opportunity to educate your next generation, its an opportunity to make important delineation between the fiduciary overseeing role to the operational role and it gives people a chance to give some input as to whether or not, you know, they think that Jimmy should be the President for the next 25 years or not, and whether or not there’s a succession plan on the operational side. And that’s the most important because if you’re going to be pegging someone in a career path, you want to make sure that they’re comfortable with their career path and someone might say look, I don’t want to be…I want to be a director because I just want to oversee this; I want to get on with my own…I’m a dentist, I want to run my practice but I want to be involved in the family company, and let Jimmy stay on as President because I’m not going to be there on an operational standpoint day-to-day. You make sure you allow for that discussion and you make sure you document it in the shareholders’ agreement.
Suzana Popovic-Montag: That’s right. And so you can add, for instance, you know, minimum and maximum numbers of officers and directors, you can talk about as you say, the succession of that office, if someone is going to be replacing them. You can put in different kinds of conditions to help people understand that this was the plan at the time and this is sort of the plan going forward. Because one of the things we always hear from a litigation perspective is well this is what so-and-so intended. So here’s an opportunity to build that right into the plan so that everyone knows right from the get go what the intention is going forward.
Ian Hull: Well that’s a great idea. Alright so once we’ve got the mechanics under control, the apropos of this day and age, the question of financing can be actually the first and foremost issue on the table, certainly from an operational standpoint but an ongoing standpoint. So the parent may have established some fairly considerable wealth and there’s lots of cash in the company and maybe financing isn’t an issue but that’s typically not the way we see it. Typically what we see is that the parent has established a cash flow business and that cash flow business meaning that the parent has taken out the money as much and as quickly as possible, so there isn’t typically tons of money sitting in a retained earning basis or anything like that. So to pass on to that next generation, you need to make sure that (a) from a management standpoint they’re ready but what do we do about financing? And who’s going to finance? And that’s got to be one of the discussion points, I think, both that it’s addressed in the shareholders’ agreement but is addressed to the family again on the reality check.
Suzana Popovic-Montag: Right. And I see financing sort of as a continuous consideration because as you say, right from the get go, how do you create the corporation, how is it finance? During the course of the corporation’s lifetime, how do you deal with cash shortages or cash difficulties at different points in time? And then I guess on the wind-up too of the corporation, if in fact that is going to happen, how do we fund that at the end of the day?
Ian Hull: And so from that standpoint, the financing it seems to me anyway, is best managed (a) on an educational level, so that when you’re creating the shareholders’ agreement it says give an opportunity to teach people. Well look, you know what, it is a great operating company. The books company is selling lots of books but we have to pay for those books and take our profit on the way out. So we have to come up with the money to put the inventory in and how are we doing that, and how are we doing it in a shrinking market and so on. These are the sorts of things where you can really get a chance to roll your sleeves up and teach the next generation as opposed to anything else.
Alright well once we’ve created the financing arrangements, one of the last questions I think, on the financing issue, is who is going to put money in? And is it going to be the continuing of the parent? Is there expectations of the next generation to put money in? Is there expectations of the next generation to go and put a mortgage on their house to help fund the company? What do we do and not do in that scenario? And obviously lots depends on the circumstances of the company, but these are the kinds of issues that you can really drill down with. And not only have you taught them, but you may have to decide whether or not they are active participants in the financing.
Suzana Popovic-Montag: Right, and also provide for the fact that, you know, the nature of the corporation may change too. So whereas originally personal funding, personal commitments, mortgages on homes, may seem like a great idea, if that book company suddenly becomes you know a very large corporation and it has perhaps outside shareholders, then at that point, the funding requirements, the financing situations, may change. And so thinking that forward, I know it’s a little bit optimistic but I think you should just put your mind to it a little bit at the end of the day, it also helps with that planning process.
Ian Hull: And that brings me to my last thought on financing and that is we have to look at the negative too. And what if it’s a closely held company? What if we have to bring outsiders in? Not just a lending institution but perhaps someone who’s going to take debt equity or someone who’s going to be a third party purchaser of shares, that kind of scenario. What is our shareholders’ agreement addressing and is it considering that option? Because if you paint it all rosy and you haven’t thought about that, and you haven’t talked about that with your family and said look, you know, what if another company comes in and buys 30% of us just to keep us going from a financing standpoint? How do we then share our existing ownership? How do we spread that around to accommodate a third party coming in? So that’s a scenario that wasn’t talked about as much two years ago as it is now, but one that is allowed for and can be definitely carefully documented.
Alright, well I think that sort of summarizes our thinking on that and at this point anyway, we’ll wrap up our thoughts on the shareholders’ agreement and the great opportunity it brings to a closely held family to communicate and communicate important things like knowledge and communicate important things like the whole future structure of the family wealth.
So thanks very much for joining us today and don’t forget to please come in to our web page and take a look at estatelaw.hullandhull.com.
Suzana Popovic-Montag: Or provide us with any feedback you might have at hullandhull@gmail.com. Thanks very much.
Ian Hull: Thanks.
You have been listening to Hull on Estates and Succession Planning by Ian Hull and Suzana Popovic-Montag. The podcast you’ve been listening to has been provided as an information service. It is a summary of current issues in estates and estate planning. It is not legal advice and you are reminded to always speak with a legal professional regarding your specific circumstance. To listen to other Hull & Hull podcasts or leave any questions or comments, please visit our website at hullestatemediation.com.
