One of the main challenges of in-laws owning shares in a company is managing the complex family dynamics that can arise. In-laws may have different priorities or agendas than other family members, leading to conflicts and disagreements about how the business should be run. Early on, it is critical to establish clear lines of communication and decision-making processes to ensure that everyone's needs and perspectives are heard and considered. Another challenge is ensuring that in-laws have the necessary leadership and technical skills to contribute to the business effectively. Therefore, it is also important to evaluate the strengths and weaknesses of in-laws in order to provide the necessary training or support to help them succeed in their roles. However, on the flip side of these challenges, having in-laws own shares in the company can also present opportunities for the business. For one, in-laws may bring valuable skills, experience, and perspectives to the table that can help drive innovation and growth. I can share with certainty that as long as in-laws understand the rules of engagement and the accountability that goes with their mandate, expectations can be managed.
When An In-law Becomes an Outlaw
George started a small manufacturing company in the '90s. When his eldest daughter married, George excitedly asked his son-in-law, John, to work for him as his other children were still in school. In exchange for John's full-time commitment, he would receive a slightly lower compensation but with an upside equivalent to a certain percentage in the form of share ownership. Apart from the equity that John received, George never bothered to formalize any entry or exit rules, and this is where the problem started.
Over time, the relationship between the two owners became strained. George would always complain to the family that John was lazy and unreliable, causing tension and conflict between them.
Eventually, George passed away, leaving some shares to his wife and the bulk of the ownership to the children, including his daughter (John's wife). With George out of the way, John became the de facto leader of the company, and with his wife's prodding, the other offspring of George eventually decided to sell their shares to John. As the siblings' ownership diluted, John eventually became the majority shareholder.
Despite his involvement in the business right from the beginning, John's management style was ineffective, and he lacked the knowledge and skills necessary to make the business succeed. His lack of interest and motivation further worsened the situation, and the business began to suffer. Customers and suppliers left, orders decreased, and profits plummeted. Naturally, the family members became concerned about the future of the business and the legacy that George had built. In an attempt to save the business and turn things around, they tried to work with John, but their efforts were unsuccessful. Eventually, the family decided to tap our services, so we immediately prepared several corporate documents leading to the signing of several comprehensive shareholder and family ownership agreements.
With business continuously taking a heavy beating because of John's erratic leadership, the family decided to take Board action to remove John as the president and propose a new leader that could steer the company back to success.
Can our marital laws prevent an in-law from owning shares in the family business?
Can the family members and the corporation buy back the shares of the hostile in-law?
Can John be sanctioned by his fellow shareholder or Director?
Yes, to all the questions raised. However, the family members/owners must go through a series of shareholder awareness and board-level governance education and must formulate powerful agreements to deter any blood or non-blood shareholder from initiating decisions that may go against the best interest of the corporation. When in-laws are tasked to participate and even own shares in a family business, it's essential to have a clear shareholders agreement that outlines each shareholder's rights and responsibilities, including their voting rights, dividends, and other financial benefits, to keep them in check. It should also establish clear decision-making and dispute resolution processes to avoid conflicts and disagreements.