All in the family
In this second part in our three-part series, our law contributor looks more closely at how family-owned businesses can thrive. Last week, we discussed the advantages of thinking like a corporation. This week, we put those thoughts into practice.
Part 2: Be like a corporation
The Constitution and the Shareholders’ Agreement
The family Constitution is a guide that regulates the values, principles, assets, relationship and rules of a family business. The family Constitution is actually an incarnate version of the “mindfulness” principle described in the first part of this series. The Constitution reflects the family’s approach to company issues, in light of its mission, vision and philosophy, and enlightens the interaction between the family and the operations of the company.
The Shareholders’ Agreement of the family-owned businesses if it exists - regulates the relationship between the management and staff, including the partnership structure, professional relationships of the family members, management and transfers of any shares and assets of the company, and business processes for the purpose of determining the main principles for its operation. It is a specific set of rules and regulations based on the values enshrined in the Constitution. The provisions of the Shareholders’ Agreement are binding for the Shareholders and must be signed by all - although it may be amended regarding any new shareholding structures after the partnership transactions are completed. Areas regulated under the agreement include the name of the entity under which the shares are held, management rights, share transfer limitations and the rights of other shareholders in the event of the transfer of shares, limits and liberties, options, and competition provisions.
In combination, the Constitution and the Shareholders’ Agreement institutionalize family relationships within the framework of the company as well as its vision and concrete objectives. They set the foundation for the protection and regulation of the rights of every family member both during the institutionalization process and before any potential future partnerships are formed.
In family businesses, as in all professional associations, there should be a clear and forceful approach to ensuring the rights of all involved in the business to avoid suspicion and discord. A corporate governance structure should protect the rights of minority shareholders explicitly in its articles of association, regulations and the management code. Clarity ensures transparency and transparency acts as a confidence-building measure both in terms of interactions within the company and its public perception in the market in which it operates.
Minority rights should not be viewed as concessions. On the contrary, they should be considered operational and strategic foresight contributing to the company’s commercial future and sustainability. The protection of minority shareholders is a preventative measure to protect the company from administrative deadlock. In short, a successful system should balance the ability of the company to make decisions based on shareholders’ expectations while at the same time addressing any conflicts that may arise on the road to sustainability.
Partnerships with third parties
Third-party shareholders can be a part of family-owned businesses. In practice, companies are considered family businesses when 30 percent or more of the shares are held by family members. Though the presence of third-party shareholders may give the impression of division within the family, in reality, they assist in company expansion, professionalization and branding. Additionally, outside perspectives can provide objective points of view within the scope of the company’s mission and vision, particularly in critical decision-making processes.
All of these measures set the tone for the company and promote an environment of innovation. Company’s which practice corporate governance, regardless of their size, set themselves on the path of dominating their respective fields of activity. Clear rules and responsibilities set out in the Shareholders’ Agreement ensure everyone, including third party shareholders, know the limitations of their roles in the company and prevent conflict, ensuring overall equilibrium.
To be continued…
The opinions expressed in this page are the author’s own and do not reflect the views of the firm and the publication or any other individual attorney.