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Family agreements, part one: Governance multigenerational family businesses

Thomas Witteveen, Charlie Kim & Matthew McGuigan
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This story was originally published by Law360™ Canada, (www.law360.ca) a division of LexisNexis Canada.

By Charlie Kim, Matthew McGuigan, Thomas Witteveen and Jacquelyn Tran

The lifecycle of an owner-managed business can vary significantly. In some instances, the owner-manager may choose to sell the business or wind it up when they retire. Conversely, the owner-manager may instead choose to transition the business to the next generation, maintaining it as a family enterprise. Where the business is to be transitioned to the next generation, effective succession planning is essential. As part of such succession planning, a family shareholders’ agreement (a “family agreement”) often serves as the “family rule book.”

This two-part article aims to highlight some of the key provisions that should be considered in a family agreement to effectively deal with corporate management and support succession planning. However, this article does not deal with any tax or structural considerations, which are also essential to succession planning.

Case study

To illustrate the necessity of family agreements, consider the following case study. 

The family business (“Family Co.”) was founded by Helen, who represents the first generation (“G1”). Helen has four children: Mark, Lily, James and Emily, who represent the second generation (“G2”). Over time, Mark has taken an active management role in Family Co. 

As Helen gets older, she is contemplating transferring ownership interests in Family Co. to her four children and wants a family rule book setting out Family Co.’s governance matters. Specifically, Helen wants to ensure that Mark continues as an active owner-manager, whereas Lily, James and Emily will be passive owners.

Below are some key provisions that Helen and her children should consider including in their family agreement.

One voice rule

Medium and large businesses often have complicated legal structures made up of various corporations, partnerships and trusts. Furthermore, within family businesses, there are typically distinct “family groups.” For example, in our case study, Family Co. has five family groups, one for each of Helen and her four children. Each such family group may hold their ownership interests in Family Co. directly or indirectly through other entities.

To address the complexity that ownership structures may create in shareholder decision-making, family agreements often include the concept of a “one voice rule.” This rule requires each family group to appoint a designated “family representative” whereby each family group exercises its voting power as a unified block to streamline decision-making. If there are disagreements within a particular family group, these are dealt with internally.

In the context of our case study, each of the five family groups would appoint one representative to vote at shareholders’ meetings.

Board composition

Subject to any restrictions in the family agreement, the board of directors is responsible for the overall management of the corporation. While G1 is still alive and not incapacitated, he or she oftentimes retains control of the family business as the sole director. After G1 dies or becomes incapacitated and the family business transitions to G2, the family agreement may provide that each family group is entitled to appoint one director as that family group’s nominee. In many cases, this individual is the same person as the family representative under the one voice rule.

Deadlocks

Boards composed of an even number of directors risk deadlocks that can paralyze decision-making. For instance, consider if Helen were no longer involved in Family Co. and the board of directors was made up of G2. If Mark and Lily typically vote in lockstep, as do James and Emily, this may lead to deadlocks that stifle decision-making.

To address this issue, the family agreement may provide for a casting vote in the event of a deadlock. A casting vote grants one designated director (typically someone with more information or experience, like the founder or active manager) a deciding vote in the event of a tie. In the context of our case study, the family agreement may provide Mark with a casting vote given his active management role.

For more information regarding deadlocks and methods to manage them, please see our previous article here.

Veto rights

In a similar vein, family agreements often provide the day-to-day manager with veto rights over certain decisions. For instance, consider if Mark was adamant that Family Co. use excess cash to purchase a material capital asset for Family Co., but Lily, Emily and James want Family Co. to pay dividends. The family agreement may allow Mark to veto board decisions relating to dividend payments.

In providing veto rights, care should be taken to assess: (1) which director should be entitled to a veto power, if any; and (2) over which decisions such director should hold this veto power.

Fundamental business decisions

Sometimes a more passive family group does not nominate a director to represent itself on the board of directors. Nevertheless, such family group may wish to retain the right to vote on certain decisions. As with any unanimous shareholders’ agreement, this can be done by way of establishing fundamental decisions that require shareholders’ approval at a specified threshold (e.g., two-thirds of votes cast; unanimous; etc.). These decisions may include things like the sale of material capital assets, the provision of loans by a corporation to related persons or entering into a new line of business.

In our case study, assume that Helen has resigned as a director, but nevertheless wishes to have a veto right with respect to fundamental decisions. To that end, the family agreement could include a provision requiring unanimous shareholder approval to make such decisions.

Conclusion

Succession planning can be an integral part of family businesses, particularly as G1 wishes to reduce their involvement and transition the family business to G2. During this time, many succession planning issues should be addressed, including the creation of a family agreement that deals with the considerations discussed above.

In part two of this article, we will consider the following additional key provisions that can be addressed in family agreements:

1) Share transfer restrictions;
2) Funding of death taxes and life insurance;
3) Distribution policies; and
4) Dispute resolution mechanisms.


Charlie Kim is a partner in the Robins Appleby business and transactions group. His practice is focused on mergers and acquisitions, debt financing, private capital markets and shareholder and partnership arrangements in a Canadian, cross-border and international context.

Matthew McGuigan is an associate in the Robins Appleby business and transactions group advising clients on mergers and acquisitions, debt financing, private capital markets and shareholder and partnership arrangements. His practice areas encompass the Canadian, cross-border and international context.

Thomas Witteveen is an associate in the Robins Appleby tax law group. His expertise is in personal and corporate tax planning and implementation for family-owned and closely held businesses. Witteveen is also experienced in the tax dispute resolution process, having represented a wide range of clients at the audit, reassessment and appeals stages and assisted taxpayers with voluntary disclosure and relief applications.

Jacquelyn Tran worked at Robins Appleby as a summer law student in 2024 and has returned as an articling student after graduating from the University of Western Ontario faculty of law in June 2025.

At Robins Appleby, we have been providing legal advice for over 70 years to entrepreneurs, businesses, financial institutions, and foreign companies operating in Canada. Located in Toronto's financial district, our firm is trusted by clients to help solve critical, time-sensitive issues. We offer a wide range of legal services including business and transactions, affordable and social housing, litigation and dispute resolution, commercial real estate development, tax law, employment law, and estate planning.

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