In our legal system there is no legal description of what should be considered a family business and the only existing references are the legislative ones relating to the requirements to obtain the exemption in the Estate Tax and the reduction in the Inheritance and Donations Tax.
It should be noted that the family business, as an entity, has the same problems as any other, but also has other typical problems that make it worthy of a different treatment since the underlying social base is the members of a family who are partners or participants.
Their life expectancy is normally half that of a non-family business since more than 65% of these do not reach the second generation, and only between 10 and 15% of them reach the third. This situation is what has led the European Union to draw up several recommendations to facilitate the transfer of SMEs in general and family businesses in particular.
In line with these proposals, our Public Administration has issued various fiscal measures designed to favor the continuity of family businesses and their permanence over time.
The three circles model
This model was devised by the Americans John Davis and Renate Tagiuri and has become a classic by graphically explaining the interrelationships derived from the three groups of people involved in the family business, such as family, property and business, as well such as the difficulties of harmonizing the interests of the parties and preventing them from affecting the family business.
It is evident that affective, economic and material relationships are mixed and confused on many occasions in family businesses, when the margins between family and business are not perfectly delimited. The fundamental consequence is that the family entrepreneur must reconcile his dual condition as father and member of the family and his own situation as an entrepreneur.
The generational change
A large part of the family businesses that were created in the 60s and 70s will have to undertake the succession process both in the ownership and in the management of it.
This succession process originates its own conflicts, among which you should point out the founder's resistance to retirement, the absence of a retirement plan for him, the power struggle between the successors, and the distribution of the company's property.
If the family business wants to survive and successfully pass on to the next generation, it must plan succession and regulate the relationships between the family and the business so that neither interferes with the other.
The achievement of this purpose passes through the negotiation and signing of a government instrument such as the Family Protocol, in which the integral parts will analyze and try to anticipate foreseeable problems by establishing the solution mechanisms to apply when they arise.
Regarding unforeseen problems, the channels will be established that allow reaching the negotiated solution in the event that this arises.
The employer's retirement
It is clear that the employer upon reaching a certain age will have to make his own decision to retire and prepare a successor to lead the company in the future.
However, this determination is not usually easy, as it implies that you are approaching the end of your life. He must know what he is going to do when he retires and be convinced that the company of his creation will survive when he is not around. On the other hand, if the employer is going to continue to depend economically on the company to maintain his standard of living, the problem is complicated by the insecurity that is generated, since it no longer depends on his own capacity but that of his successor.
Putting things this way, the solution is not usually easy, the solution is delayed and in many cases it is not planned.
Finally, since the entrepreneur does not think about his retirement, neither does he think about the training of his successor, considering a circle that is difficult to break, which often causes the successor to lose interest in the family business and look for professional alternatives outside of she.
The consequence of the above problems is that the survival of the business is jeopardized.
When any misfortune finally occurs or the owner's death occurs, there will be no planning or training in the successor who must direct it, you will only have to face the situation and hope to be lucky to get ahead.
Strategic goals of the family
Normally all the members of the family group feel proud of the development of the companies that belong to them, which is why they usually set what are the objectives to be achieved, being able to point out among these, for example, sector specialization, future growth directly or indirectly as well as the achievement of adequate returns through expansive and diversified processes, generally with own resources.
The ultimate goal is healthy growth that does not jeopardize the viability of well-functioning companies, but rather that expansion is carried out properly and without putting equity at risk.
When family businesses set their strategic objectives focused on future growth, they usually take into account the very dimension they have achieved, but without wasting new opportunities that have a clear development, that are objectively predictable and that their logistics and organization allow.
As development occurs and thinking about the future, the possibility of increasing the assets of the family group is usually considered, with interests in other businesses that do not present excessive risk.
Given that the objective is to exceed what has already been done, the debt will always have a limit that will be set in the Family Protocol itself.
Area of application
The will agreements regulated in the Family Protocol usually indicate what type of companies they affect and their participation in the capital stock of those companies by the Family Holding.
Normally, the business family intends for the various family companies to submit to a single management subordinate to the so-called Family Holding, which will allow the group's activities to be diversified into several companies, avail themselves of the consolidated tax regime, and in some cases allow that there are partners outside the family circle, without the investees losing the character of a Closed Family Society.
Through an equity holding, the growth of family assets will be allowed, which will enjoy fiscal advantages, will enable business restructuring operations with fiscal neutrality through mergers, monetary contributions, exchanges, splits, which will be rationally useful for coordination, financing and orientation of services for the group itself.
Ordinarily, family protocols tend to understand and define what is understood by family, family branch and the different generations, as well as who are shareholders and directors. Usually they usually have an external advisor who does not belong to the family branch and whose mission will be to provide a strategic perspective of the company independent from that of the business family itself.
Sometimes the protocols even indicate the functions of the Boards of Directors of the companies with delimitation of the tactical and strategic functions, among which can be found the approval of the basic lines of the business, the approval of business restructuring operations or investments. important fixed assets that do not appear in the previously approved annual budget, as well as what type of actions will be carried out that are related to the external image of the company.
Likewise, within the protocol it is sometimes established which are the organizational functions that the Board of Directors must provide, with the appointment and removal, where appropriate, of the members of the senior management of the company, changes in the structure of the organization chart or simply budgeting or monitoring functions of the company.
The family protocol as a framework agreement
The Family Protocol as a Framework Agreement signed between relatives, current or foreseeable future partners of the same company, regulates the organization and management of the same, as well as the economic and professional relationships and interactions between the family, the property and the company, being its The purpose is to give it continuity in time and with success through the following generations.
Therefore, we can affirm that Family Protocol is understood as a set of declarations of intentions mutually agreed upon by the members of the business family that regulates the unity and dedication of the members of this family in a specific business activity, seeking a successful continuation of the same into the future.
Therefore, it supposes a moral commitment of all the members of the family group whose purpose is to maintain a specific line of action that, being faithful to the tradition and values of previous generations, aims to respond to market trends through expansion and economic diversification, with the ultimate goal of creating wealth, not only for the business family but also for society.
Therefore, the protocol is a dynamic tool that collects the feelings of the family but also a strategic projection towards the future that must be periodically reviewed both with regard to principles and rules of the game as well as its own operational decisions.
The protocol will therefore have the purpose of protecting the strategies of the family group from the abusive interference that the family itself may carry out, giving them sufficient independence so that they are not subordinated to the circumstantial interests of the different strains of the same.
This instrument will be to help overcome the structural crises of the companies through the institutions of alternative resolution of the problems such as mediation or arbitration, avoiding the confusion between the ties of the family and the contractual ties of the business.
What types of pacts fit into family protocol?
The agreements that this agreement usually contains are divided into three categories:
a- Pacts with moral force, ordinarily known as Pacts between Gentlemen, which, however, do not give rise to rights or obligations, rather they are rules of conduct for the family that are necessary for all its members to observe in their daily work.
They are therefore commitments related to ethics, philosophy and values. Derived from the foregoing is that failure to comply, if it occurs, may only be subject to social censorship by the rest of the members of the business family, but without legal effectiveness.
b- Agreements with simple contractual force, here are included agreements that regulate certain actions that the signatories of the Family Protocol must observe in their relationship with the other signatories, the family and the company.
Included in this case are the prohibition of carrying out activities that are concurrent with that of the company, those others whose purpose is to regulate the possibility of access of family members to jobs in the same, remuneration policies, as well as prohibition of family members receiving excessive loans that decapitalize the company.
Likewise, the incorporation or not of external advisers and rules for the interpretation and application of the Family Protocol are usually included in this section, either through an arbitration of law or equity. These agreements include family values that have contributed to the success of the company, and among these are those related to the business environment, professionalization or not of management, promotion of new businesses and the need for information transparency.
Failure to comply with these covenants legitimizes any of its signatories to request the aid of the signatories, either to demand forced compliance, the corresponding compensation, or the consequences established in the event of non-compliance.
c- Agreements with force or effectiveness against third parties, which are those that have access to the Mercantile Registry, bind all the signatories of the family protocol and can be enforced against third parties outside the same, for which they must be subject to development in complementary legal instruments, such as Family Capitulations and Social Bylaws, which must be registered in the corresponding Public Registry.
The legal protection of this type of acts that in addition to binding the signatories of the protocol, oblige third parties, have the consequence that they can be claimed by them before the corresponding Courts. The latter may include the regime for the transfer of social partitions, the majority regime for the adoption of resolutions and the Board of Directors.
When is it convenient to sign a family protocol?
The main objective of the Protocol is to guarantee the continuity of the company in the hands of the owner family and to achieve it with the lowest possible personal and fiscal cost.
The best time to propose the development of this is when there are no family problems and the situation of the company is not conflictive. If not, the best decision will be to postpone its preparation until the situation is more conducive to it.
The protocol should be accepted by all interested parties, since its imposition by force may cause problems in the future, more likely than if the content has been accepted out of conviction.
The approval of this passes through the approval of all the affected members and if it does not exist it will be necessary either to convince the dissenters or to find a valid alternative for all.
The approval by majority will hardly be useful since those who do not agree will begin to claim from the moment the agreement is imposed.
Finally, the protocol must be subject to a review either annually or biannually in order to reform the aspects that have not worked well, delve into those that have produced results and adapt it to the changes that have occurred, both within the of the family as in that of the company, and in this way ensure that it never loses currency or validity
The preparation, negotiation and signature allows obtaining a series of advantages for the business family that can be summarized in the following points:
- Delimit the spheres of action of the company and the family avoiding interferences between them Depersonalize and objectify certain decisions that are likely to provoke internal discussions among the members, thus, for example, the obligation for all members of the family to establish Marriage Chapters in the one that is set as the Marital Economic Regime of the Separation of Assets Indicate the problems that may arise in the future around the family and the company and the solution mechanisms for them Establish the channels to solve the possible problems that arise and that have not been foreseen, trying to guarantee that these incidents do not harm the company.
The family protocol never has a unique content that can be valid for any type of family business, but must be adapted to each one of them as if it were a tailored suit.
By way of example we will point out some points:
- Scope of the Protocol, that is, companies, goods and people affected by it Governing Bodies of the Company and their operating regime, such as the Board of Directors, Executive Committee, Managing Directors and General Director Governing Bodies of the Family in which the structure, composition and functioning of the Family Council will be determined Situation of the family members with respect to the company, with appointment of the successor, access procedure, determination of the people who will work in it and the jobs that may perform, as well as their remuneration Shareholder situation, with distribution of capital and its incidence in the governance of the company, as well as the establishment of quorums for the adoption of agreements of strategic or economic importance.Transfer of shares or participations in the capital stock, establishing the criteria for both intervivo and mortis causa transfer, and voluntarily or forcibly Dividend Policy of the company and loans to partners Information Policy to be provided to family members who are partners but that do not work in the company and those who work but are not partners Revision Rules of the protocol with their deadlines to avoid losing their validityand voluntarily or forced Dividend Policy of the company and loans to partners Information Policy to be provided to family members who are partners but do not work in the company and those who work but are not partners Protocol Review Rules with deadlines to avoid lose its validityand voluntarily or forced Dividend Policy of the company and loans to partners Information Policy to be provided to family members who are partners but do not work in the company and those who work but are not partners Protocol Review Rules with deadlines to avoid lose its validity
Purpose of the family protocol
The purpose of the Protocol is to ensure the future continuity of the company, limiting the rights and duties of the members of the business family, both as shareholders and as employees or members of the management bodies.
The Protocol will express the values, mission and philosophy of the business family itself, expressing the tradition of respect for the elderly, caring for and anticipating their economic needs.
It will also take care that there is a good working environment as well as a good management of human resources, and will provide, according to the vocation and characteristics of each member of successive generations, their incorporation into administration and management tasks, ensuring the future survival of the company through their professionalism, adequate to face present and future challenges.
The protocol, the family and the company
The purpose of the family is to professionalize the structure of the company, recognizing the possibility that members of the same form part of the management teams of the same based on their degree of training and experience. Family members who aspire to work in the family business should take into account that they are expected to have a special, exemplary professional and professional attitude in relation to other workers in the company.
Sometimes the Family Protocol indicates the will of the family that in-laws of the shareholders should not be incorporated to work in the family business, as well as that independent services or through any company are not provided to the family business.
Requirements for joining the company
Family members who wish to apply for a managerial position in the near future must always meet an objective profile previously designed in the protocol, stating their clear vocation to work in it, have professional experience and certain university academic levels, whether they are higher. or media.
However, in order for them to occupy said positions, there must always be a vacancy or need that must be covered in the opinion of the Board of Directors.
In the Family Protocol it can also be established what the selection process is when there are needs that must be covered, how the departure of family members will be produced by agreement of the Board of Directors and what the remuneration of the family members will be, establishing the age maximum retirement and therefore the need to anticipate the replacement of the managerial or management position.
Family and property protocol
The family protocol usually regulates the rights and preferential acquisition as well as the transferability of the shares or social participations of the family companies referred to in the scope of application, and ordinarily the family branch from which they come will have preference. the shares and if this is not interested in the total or partial acquisition, the other family branches will always enjoy preference over what is not acquired.
In the event that two or more different family branches from which the shares originate are interested in acquiring the same, it will be determined in the protocol how they will be distributed and likewise, if no family branch is interested, the possibilities of its being exercised will be established. the principle of treasury stock of the family business.
In the protocol, it will normally be agreed that in the event of separation or dissolution of the marriage of a member when there are no matrimonial agreements, there is a preferential right of acquisition in favor of the partner-family members.
Valuation of shares or participations
To determine the price of the transfer of shares or participations between family members, the family business can go to an independent technician who makes an estimated valuation and normally the protocol establishes that the shareholders agree to accept the price and the calculation system, indicating the commitment that any shareholder member who intends to make transfers between family members agrees to accept the indicated price during the terms indicated in the agreement.
Shareholders' rights
The Protocol will establish the levels of indebtedness that the business family may have. A distribution of dividends will be established when they can be exercised, as well as the rights to request loans from the family business at market interest, indicating the guarantees and how it will be decided on their granting at the proposal of the Family Council
Other issues that can be agreed in the protocols
These instruments can establish remuneration policies for the Boards of Directors and managers, establishing the criteria that differentiate the remuneration of the family group as a shareholder, director and as a manager or executive, adjusting their remuneration to the supply and demand of the area where the company resides.
The incorporation of members of the family unit to the management group will require that the worth of the person who is offered for the position be verified, with the existence of a vacancy or need not covered, as well as a remuneration attributable to that responsibility according to the habits established in the area where the company is located.
Sometimes these agreements have supplementary notes where the preferential acquisition rights and purchase option rules are regulated, as well as transmission to members or interviving or mortis cause third parties, the order of acquisition, mechanisms to determine the price of the shares, or procedures for the exclusion of members of the family business for carrying out activities contrary to the law or the exercise of business activities in direct competition with the companies that are members of the family business group.
Likewise, rules of exclusion of a family member may be included, but always for serious and repeated non-compliance with the family business group, non-compliance with the provisions of arbitration awards to resolve conflicts or non-compliance with the obligations contained in the family protocol.
Protocol development
For this instrument, conceived as a Framework Agreement, to be effective, it is necessary that it be developed by other documents, each of which will regulate partial aspects thereof and whose set, together with the Governing Bodies, will constitute the legal scheme that will give force and legal consistency to the family business.
Development documents include:
1. Marriage Capitulations
2. The will of the employer and his children
3. Bylaws that have to regulate the agreements relating to the operation of the company, without prejudice to the fact that other private agreements may be established between the partners included outside the bylaws, which will be enforceable from the parties signing them.
The governance of the business family
The governing bodies of the business family are the Family Board and the Family Council and the company's bodies are the General Meeting and the Board of Directors.
The Family Board is the informative and non-decision-making body that brings together all the members of the family, including the spouses, from a certain age, whether they work or not in the company and whether or not they are owners of it. Its functions include:
- Information on the progress of the company and the events that affect it Establish the forum in which the family is constituted in relation to the company as well as the forms that facilitate its continuation Detect problems that may arise in the business family and that may affect it Bring the problems that are detected to the Family Council and the Board of Directors so that these institutions make the decisions for their solution
For the Family Board to function effectively, it will need to have a leader who presides over it and organizes its meetings, establishes the calendar and moderates the development of the meetings.
The leader of the Family Board should not coincide with the family member who presides over the Board of Directors since they are different bodies.
The Family Board must hold at least one annual meeting in which it examines the situation of the company and its financial statements, the situation of family-company relations and the state of succession planning, without taking decisions that may affect the operational aspects of the management of the company, that is, without interfering with its running
Family council
The Family Council is the decision-making body of the business family that regulates its operation and its relations with the company and its functions include:
- Manage and negotiate the Family Protocol as well as its updates or reform it Direct the Company Succession process Resolve relationship problems that arise between the family and the company and notably maintain the separation of the assets of both institutions Defend the rights of the members of the family who do not work in the same whether or not they are owners Create a communication system that facilitates relationships between the different members of the family
In order to achieve a balanced composition of this institution that allows knowing all the points of view of the components of the business family, it must be taken into account that all family branches must be represented in this institution, both working partners and those who they do not work in the company and that all generations are equally represented.
Therefore, the Family Council will be the highest organ of the Family Protocol and will be made up of significant family members who belong to the different family branches, who by their moral authority, age or property are deemed convenient.
This Family Council may have various committees as adjacent bodies, such as liquidity, training or arbitration. The purpose of the Liquidity Committee is to study the requests made by the family owners and advise the Family Council on the use of the funds attached to it.
The Training Committees will have as an essential mission the training of family members who want to work in the company and make proposals according to the ability and knowledge of the family members.
On the contrary, the Arbitration Committee will have mediation and arbitration itself as an essential function to avoid defusing conflicts between family members.
These arbitrations may be of law or of equity and may be entrusted to third parties, usually professionals of recognized prestige who provide fair and equitable solutions to the problems raised.
In certain Family Protocols it is established that the Family Council can create funds for the training of descendants as well as the creation of tutorial systems that facilitate the professional orientation of those who want to work in the company, as well as career planning. The Training Fund can be used by decision of the Family Council to foresee other needs that may arise in the future.
Government of the family business
There are two governing bodies of the family business: the General Meeting and the Board of Directors.
General Meeting
It is the supreme or sovereign body of the company made up of all the partners of the same and from which the social will emanates and decides by legal or statutory majority on matters within its competence-
Its duties?
- Censorship of Social Management, approval of accounts and application of results Modification of the Company Bylaws Increase and reduction of share capital Dismissal and appointment of administrators Transformation, merger or spin-off of the company.
In the family business, it is necessary to take into account that the establishment of a quorum higher than those established in the Regulatory Law of the Stock Company or Limited Company can serve us for the good governance of the family business, and each specific case must be studied, to adapt each situation to the objective to be achieved.
Board of directors
It is the executive body of the company in charge of the management of the company and among its functions is that of holding the organic representation of the company, which reaches all the areas included in the corporate purpose without any limitation.
It will also design the long-term policies of the company, indicating the objectives to be met and pursuing their fulfillment. The Board of Directors in the area of succession must help to complete the process of transition to succession.
If you want to achieve a point of balance between all the interests at stake, the Board of Directors must be represented:
- By members who represent the capital stock in the appropriate proportion, whether or not they are family members By Company Directors who are not owners of the company, who can act as a transmission belt between the company and the Board By Company Directors who belong to the family Family members who are not directors of the company Qualified external advisers who can help impartially to evaluate and decide on other issues such as the performance of family members who work in the company, appointment of the successor and their professional care.
Therefore, the main objective of the Board of Directors is to protect the interests of the company and all shareholders and will be the highest governing body of the company.
The Family Protocol usually establishes the duration of the mandate of the members of the Board of Directors, the composition of this body based on their own participation in the business and the appointment of external advisers as voice but without vote.
Recommendations will also be collected on how often this Council should meet and the creation, if applicable, of Delegated Committees for the performance of powers that contribute to improving the effectiveness of its operation, with establishment of functions, periodicity of meetings, number of members.
Sometimes in the family protocols it is established whether the members of the Board of Directors will be able to receive per diems for its meetings, the functions of the President and the Secretary are regulated, as well as that of the External Advisors.
Within this Council, Commissions or Boards of Directors can be created for the strategic development of the group that seek business opportunities, resources and make concrete decisions for the effective incorporation of the new generations into the group.
