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.

Minority rights

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.

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