Multiple layers of family governance
Experts estimate that around 80 percent of all businesses in North
America are family controlled, and family businesses account for
approximately 70 percent of global gross domestic product (GDP).
That said, less than one quarter of family businesses in the United
States survive into the third generation. This gives attorneys good
reason to understand the nuances that make family businesses
different from other clients.
The oldest family-owned business in the United States, Zildjian, a
cymbal-manufacturing company, pre-dates the United States itself.
Founded in 1623 in the Ottoman Empire, Zildjian continues to
operate as a 14th generation family business in Massachusetts. Such
family businesses survive thanks in part to clearly established
rules and policies regarding family involvement in and expectations
for the business. It is important for lawyers advising family
businesses to understand not only the elements of corporate
governance, but also family governance.
The first point of overlap between corporate governance and family
governance is generally a buy-sell agreement. The agreement may
include to whom shares of a company may be sold, conditions for a
shareholder buy-out and a method for determining the price of the
shares. Family businesses will commonly want to provide a first
right of refusal to the business and/or other family shareholders
before a shareholder can turn to outside buyers in order to protect
the ownership interests of the business.
Families further along in their dialogue about the relationship
between the family and the business may want a more comprehensive
shareholders agreement that includes additional business and
ownership elements beyond share transfer conditions. Some sample
elements of a family shareholders agreement may include:
confidentiality agreements, conflict of interest and non-compete
agreements, provisions concerning death or divorce of a family
shareholder, dividend policies and board composition, among many
others. An important point of practice is to carefully and
conspicuously mark any certificated shares covered by a buy-sell or
shareholders agreement as being subject to such agreement.
While shareholders agreements are generally legally binding
documents, there are a number of other family ownership
considerations that may be addressed in other documents that may
not be legally binding. These documents may include family
employment and compensation agreements, coordinated estate planning
agreements, prenuptial agreement policies, codes of conduct, family
philanthropy policies, public relations policies and future
leadership or development policies among others. Some families
consolidate these policies into a single family constitution. While
a carefully drafted family constitution, or the separate elements
thereof, may be legally binding if the basic contract elements are
satisfied, most family business experts accept the family
constitution as a non-legally binding document valued for the
dialogue surrounding its creation. Often, dialogue and consensus
are more valuable to the business and the family than a legally
binding document that alienates one or more of the
shareholders.
Family businesses generally have a longer-term focus than other
businesses, which means their governance goals will likely differ
from typical business clients. When dealing with family businesses,
attorneys should ensure that the client is properly informed on
which documents are legally binding and how non-binding documents
could be made legally binding, but one should also accept that
modifying documents to improve their legal efficacy is not always
the best course of action for the family involved.