Switzerland: The Family Businesses: The Essence Of A Family Constitution

Last Updated: 31 December 2012
Article by Janelise Favre

Family businesses are neither families nor companies but the better or worse of both! Family businesses should deserve specific approach and obtain tailor-made advice in order for them to last for generations. This article lines out the usefulness of a family constitution and its content.

Over time, families and their businesses usually become more complex: the ownership fragments as it passes down through generations, the expectations of the family members may diverge and related conflicts may arise.

Even if all family businesses are different, successful family businesses have at least one thing in common: they are well organised. Part of this organisation is implemented by a family constitution.

According to John L. Ward, author of several leading books relating to family businesses: "the family constitution is among the most important steps a business-owning family can take to secure and strengthen its business and, most preciously, its family."1

1. The definition of the family constitution and its signatories

A family constitution is a document which specifies the relationship between the business and the family and sets out the roles, compositions and powers of the key governance bodies of the company, that is to say, the family members, the shareholders, the management and the board of directors.

The main difference between a family constitution and a shareholders' agreement is their respective signatories. By definition, shareholders' agreements concern only the shareholders of a company. However, in a family business, it is not necessary to be a shareholder to be concerned about and have an interest in the company. Therefore, it is important for all the family members to be party to an agreement which clarifies guidelines for the sustainability of the company. The family constitution is normally signed and ratified by each new family member as they become adults or marry into the family.

2. The content of the family constitution

Each family and each business are unique; therefore, each family constitution will reflect the unique characteristics of both the business and the family. Nevertheless, some important topics are commonly covered in the family constitution:

  • Strategic business objectives reflecting the agreed family values;
  • How should the family be organised (composition and organisation of the family meeting and/or the family council, involvement of the next generation);
  • The hiring and compensation of family members employed within the company (when and under which circumstances can family members join the business? What education and previous work experience do they need? Are in-laws welcome to join the company?);
  • The process for dealing with family and non-family employees;
  • The process for resolving conflicts among family members;
  • The policy relating to estate-planning matters;
  • The rules regarding the succession of the family members in the management and on the board of directors (recommended or compulsory retirement age);
  • The process for nominating the family council (the composition and the rules of conduct); 
  • The policy in respect of loans to the family members (venture program: if a family member wants to start a new business, should the family and/or the company provide him equity capital?);
  • The procedure for amendments of the constitution.

Some topics, which are generally covered in shareholders' agreements, should also be reflected in the family constitution to ensure that all family members agree with them, for example:

  • The process for nominating the board of directors (the composition and the rules of conduct);
  • The process to become a shareholder (limited to bloodlines or to spouses and partners? the rights and obligations of the shareholders);
  • The process for transferring/selling the ownership within the family;
  • The policy regarding the distribution of the dividends, the funding of the company.

The form of a family constitution is similar to that of a shareholders' agreement. It should be clear, simple and understandable. Ideally, the family constitution is a living document which evolves over time to reflect changes in the family and business. Furthermore, some policies and/or processes defined in the family constitution should be added, if possible, in other documents which provide the legal structure and the governance of the company (e.g. articles of associations and shareholders' agreements).

Under Swiss law, a family constitution is qualified as a partnership. Therefore, the enforceability against its signatories (the family members) should not raise any particular issues. However, its enforceability against third party shareholders, if any, and the family business itself should be analysed on a case by case basis.

3. The family constitution: an essential document for family businesses

When possible, a family constitution should be developed early in the life of the company so that the discussions and decisions are not focused on the situation of an individual family member.2

The process of creating a family constitution has the added feature of building the family decision-making process and enforces family bonds as it often brings the family members to discuss main issues relating to the family business, which would likely otherwise be avoided by embarrassment or shyness. This process has also a significant psychological impact: it helps the generation in power to consider accurately its succession and leads, for the next generation, to a reflexion regarding its future within the family business. 

It is recognized that the content of a family constitution combining the owners' need, the business' requirements and the family's wishes offers a variety of important benefits. Indeed, it allows building not only a stronger business but also a stronger family, as well as opening up the succession process and planning for the future of the business.

A family constitution is the ideal tool for family members to anticipate contentious issues and decide, as a group, how to handle them. While a family constitution may not prevents conflicts, concrete policies and/or processes will assure the family and the management that potential problems can be resolved quickly and that decisions will be consistently applied to each member.

To conclude, a good family constitution can perpetuate a family business for a long time. Therefore, each family business should consider the implementation of a family constitution as a high priority to ensure an efficient planning of the future and the everlasting prosperity of the family and its businesses.

Footnotes

1 Daniel Montemerlo and Lohn L. Ward: The Family Constitution: Agreements to Secure and Perpetuate your Family and your Business

2 Dr. Randel S. Carlock, founding director of the Wendel International Center for Family Entreprises at INSEAD, Strategic planning for Family Business, Randel S. Carlock and John L. Ward

Originally published by International Law Office, November 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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