As part of managing generational transitions, four siblings and their spouses, the next-generation ownership team, were in the process of reviewing and revising their shareholders’ agreement. Estate planning and corporate attorneys, their accountant, and their family business consultant were on hand as resources and facilitators of the discussion.

The ownership group, the third-generation owners of a growing and successful distribution business, had been meeting regularly for many years. They worked through issues related to their own relationships, their philosophies toward the business and the family, business operations and governance, policies governing the relationship between the business and the family, and other issues. They had formed, stormed, normed, and performed. They’d dealt with challenges and conflicts, victories and triumphs. They’d been tested and tried and knew times of despair and joy.
The shareholders’ agreement discussion continued. The attorneys posed many questions. The shareholders listened, asked questions, discussed issues, and reached conclusions. One question asked by an attorney, fairly standard in shareholder agreement planning, was, “Can stock in the company be used as collateral for loans for individual stockholders?” Most of the shareholders had given that question absolutely no thought. Several additional questions were asked, but the reactions ranged primarily from confusion to apathy and the discussion was going in small, unsatisfying loops.

“Think of it this way,” suggested the family business consultant. “It is really a philosophical question. If you say that you can use stock for collateral, you are saying that you should be able to put your stock at risk as you leverage it to pursue your individual financial goals. If you say that you cannot use the stock as collateral, you are agreeing not to put the stock at risk and taking the position that your role is that of steward, protecting the stock even at the potential cost of not pursuing personal goals.”

The members of the group had long before decided to define themselves as stewards and protectors of the enterprise. They agreed that modest living was more desirable than aggressive consumption. At least one of the shareholders had her own business, but stock in the family business was not viewed as a source of capital for that enterprise.

The shareholder suddenly got it. “Well, when you put it that way,” she said, “it’s easy. We shouldn’t make loans against our stock.” And everyone quickly agreed.

When the discussion was over and the attorneys retreated to do their scrivening, the shareholders talked about the experience.

“That wasn’t so bad,” said one.

“It could have been,” said another. “We’ve spent 20 years working together to build our knowledge, consensus, and relationships. If we hadn’t done that, I could see us having a much harder time—maybe fighting, maybe never reaching answers. All the hard work we’ve done, which makes it now seem easy, has really made it possible for us to be on the same page as we make decisions together.”