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- The importance of the family business
We must start from the fact that almost 90% of the Spanish business sector is comprised by companies with a large family component, which means, companies in which one or more founding families have control of the company through a significant shareholding in its capital and through the adoption of strategic business decisions (hereinafter, the “Family Business”).
Likewise, the importance of these types of companies in the creation of private jobs and GDP are characterised by their vocation of continuity and the family’s will to transfer the business in future negotiations.
In consideration of this data and the need to improve the planning adapted to the unique circumstances of each company and thus prevent the disappearance at the time of succession to future generations, the preparation and execution of a family protocol is essential to regulate the personal and family relationships of the members of the family business and thus achieve a continuous and stable perseverance over time.
- What does the Family Protocol consist of?
The Family Protocol is a document subscribed by the members of the family with direct or indirect interests in the Family Business. This means, it can be subscribed from the founder of the Family Firm up to the spouse of one of the descendants who is not involved in the management of the Company.
This protocol configures the directives and principles that shall stipulate the internal operation of the Family Business in question which the members of the family must respect and obey.
It is considered to be the best tool to stipulate the proceeding that will eventually govern the generational handover and the continuity of the business, thus avoiding (or at least minimising) potential conflicts between family members at the most crucial moments of the evolution.
As we have indicated, it is a heterogeneous document with a far-reaching scope, hence the determination of which family members should sign the Family Protocol will depend on the structure of the family in question; thus, it is common that, in addition to the direct shareholders of the company, their spouses and descendants also endorse the document.
We must highlight that the Family Protocol may become outdated and redundant if it is not considered as a dynamic document and therefore, it is periodically reviewed to adapt it to the changing reality of the Family Business and the new approach of the future generations.
- Preparation and content of the Family Protocol
The Family Protocol is designed as the essential document in the management of the relationships among the Family members and with the Business. It makes it possible to anticipate future conflicts that could arise within the company and the family itself, as well as facilitating the intergenerational change.
In the Family Protocol, the Family members can regulate diverse issues such as tax planning for family members, the Company financing based on family resources or conversely, the financing of family members based on the business resources, the protection of the rights of spouses and the preparation of succession. This means numerous issues and topics can be covered in the Family Protocol.
Exhaustive analysis work must be previously done for the proper preparation of a Family Protocol. The particular details of each Family Business and the specific needs of each family must be detected. Consequently, the preparatory work to determine the specific content of the Protocol has vital importance, based on meetings and interviews with different members of the Family.
Having stated the above, it seems clear that the contents of the Protocol are not closed but shall depend on the specific circumstances in each case.
Nevertheless and despite the fact that there is no standard Family Protocol form, it is common to include the following sections:
- The guiding principles of the Family Business.
- System for the transfer of shares or corporate holdings.
- Governing bodies.
- The policies for remuneration, dividends, access to management positions.
- The succession regime.
- Marriage articles.
- Prevention and resolution of conflicts.
- Formalisation and effectiveness of the Family Protocol
Although there is freedom when formalising the Family Protocol, it is recommended that it be converted into a public document before a Notary and all family members who are affected by the Family Protocol be present at its granting.
Likewise, said document can be accessed at the Mercantile Registry, either by merely recording its existence but not its content, or by depositing it in full or in part.
Furthermore, since the ruling from the Directorate General of Registries and Notary Offices, of 26th of June 2018, which covers the possibility of establishing the mandatory compliance with the provisions contained in the family protocol as an ancillary provision in the Corporate Bylaws, it can be given greater force due to its enforceability against third parties.
Insofar as the content of the Family Protocol is widely heterogeneous and regulates numerous aspects of the Family Business, some of its agreements shall only have moral force (such as the family values or the company’s mission), while others will be enforceable as contractual agreements, and may even include penalties to compensate for damages and detriments that can be caused by the non-compliance of any family members.
Likewise, in order to strengthen the content of what has been agreed within the family, it is recommended that certain relevant aspects, such as the system for the transfer of shares or corporate holdings, be recorded in the corporate bylaws of the Family Business and consequently, be subject to ad hoc registration in the Mercantile Registry.