Shares for family members

You should always take advice before you give class shares in your company to family members - to make sure you achieve your objectives, to make sure you don't inadvertently lose control of (or deadlock) your company, and to make sure the tax position for both company and shareholders is as favourable as it can be.

Once you have issued shares to family members you can't change the rights that attach to them without their consent. So you can't change your mind if you subsequently realise you have given them too many, or the wrong, share rights. That's why advice is crucial.

Objectives of giving shares to family members

You can give shares to family members (or to trustees of a trust set up for their benefit) just to provide them with income. Alternatively, you may wish to give shares to family members as part of a process that will eventually lead to their taking over ownership of the business.

Articles of Association -v- shareholders' agreement

Shareholder rights can be set out either in a company's articles, or in a shareholders' agreement, or in a combination of the two. Technically, they can also be set out in a shareholders' resolution too, but this is rare. There are pros and cons to each - you will need advice on which is best for you. Very broadly, a shareholders' agreement is appropriate if the arrangements you want to set up are for individuals involved with the company (or some of them) now. Articles are appropriate if you want the arrangements to apply to future shareholders too.

Naming the shares

Finally, please note that a class of shares can be given any name you wish. For example, there is no set of fixed rights that must apply if you call your shares 'preference' shares - the rights attached to preference shares may be quite different in two different companies. Usually, though, it is sensible for the name to reflect the rights attached to the shares.

For example, the share rights for a class of non-voting, redeemable shares may also say that, if a preferential dividend is not paid in one period it is to be carried forward and paid in a subsequent period. In those circumstances, the dividend is said to be 'cumulative'. If the share rights say that the preferential shares are also entitled to an ordinary dividend, as well as the preferential dividend, they are said to be 'participating'. Good practice would be to call such shares Cumulative, Participating, Redeemable, Non-Voting Preference shares.

Always take legal advice on the rights appropriate to your particular circumstances when considering shares for family members.