What is the Importance of a Family Charter for Family Businesses?

Running a family business can have many complexities. One of those is the family itself. We explain the importance of family charters and why having one in place can help the business steer a clear course to continued success.

What are family charters?

Family charters are statements of intent or agreements entered into by the family members in relation to a family business. Normally they are either not legally binding at all or only partly legally binding and set out:

• How the family wishes the business to be run;

• The family’s goals and the long-term strategy for the business;

• The family’s relationship with the business; and

• How the family members should behave towards each other in the context of the business.

By having a charter in place, this can help to bring consensus amongst family members on how the business should be run and put some structure on the difficult overlap between family and business.

As families grow, in a relatively short period there can be a substantial increase in the number of family members with a direct or indirect involvement in the business. For example, two brothers might set up a family business, each brother then has two children who then in turn each have two children. By the time the members of the third generation have become adults, there will be a large number of family members who may have some sort of connection or involvement with the business, which could extend to spouses who may have become involved in the business.

Business succession planning - future generations

This can bring with it a number of different issues and complexities such as:

• How will the next managing director of the business be chosen? Will he or she come from within or without the family and how will he/she be agreed upon? What if some family members want to be involved in the business but others wish to exclude them?

• Who should be employed in the business and who can sit on the board? In what circumstances will family members be removed from employment or directorship or even lose their shares?

• Who is entitled to own shares and what happens if someone wants to sell their shares? What are the succession rights, can shares be passed to spouses and will there be any restrictions on what happens to those shares in the event of a separation/divorce?

• How does the family communicate its views and/or protect interests if not all family shareholders are directors? Who will be able to attend the board meetings, who is entitled to information or a veto on decisions and how will split decisions be dealt with?

• Should important, loyal and long serving non-family members working in the business be awarded shares or possibly be appointed as directors?

• What happens if there is a dispute/difference of opinion between family members in relation to the business?

• How will the family avoid a feeling of exclusion amongst members who are not employed in the business and/or are not shareholders?

Differences between a family charter and a shareholders’ agreement

Many people in business have heard of shareholders agreements, which are agreements entered between the company’s shareholders setting out how they will run the company and will usually be legally binding, but a family charter is a relatively little known document A family charter is made only between the family members involved in a business and may include both those family members who hold shares and those who do not, and similarly will exclude non-family members who do hold shares. The two documents may therefore sit together and complement each other as part of a suite of company documents.

Another potential difference is that a family charter may be agreed as not legally binding or only partially legally binding and often includes guidelines or principles for the future.

Issues which might be covered in a family charter include the following:

• Key business decisions in respect of which the family should be entitled to direct or influence the board.

• The company’s dividend policy.

• Educating, involving and providing careers for the next generation and employment in the family business.

• Communicating with and providing information to family members who are not involved in the business on a day to day basis.

• A dispute resolution procedure to deal with conflicts between family members.

• Reviewing and amending the charter at certain times e.g. on death of a family member, or where there is growth to include new family members as part of the business.

In some cases, family charters may set out broad, non-binding principles relating to the family’s policy on certain matters, with those principles then being enshrined in a binding form in the company’s articles of association or a shareholders’ agreement. A good example of this is the family’s policy on ownership of shares.

No two charters are the same

Family charters, much like a shareholders agreement, are individual to each business and its unique circumstances – there is no one size fits all document and each will be drawn up to reflect the family’s own requirements. Some charters may be very short while others can be more in-depth and lengthy, particularly where there is a large family or the business is more complex.

It is likely that some family members will have views on the business which may be particularly emotive or difficult to raise with other family members if they feel that they will be judged or it will cause tensions – by having a neutral party to assist with drawing up the agreement, these views can be shared more easily and often on an anonymous basis, and it also avoids the possibility of the agreement being one-sided or biased towards one or more family members.

For businesses looking to draw up a family charter, or those wanting to find out more about these documents and what can be contained within them, please get in contact.