This is the first of four articles in which we will explore a number of common family business issues and the documents which can be used to address them.
In this article we consider the main documents which can provide a proper foundation for governance and succession in your family business.
This may also be called the family constitution, family creed, family protocol or family agreement. The family charter is the main document in which the family sets out its values, vision and commitment to the family business. It also contains the family's position on key issues such as who can own shares in, or work for, the family business.
Family charters are rarely binding legal documents. However, as they are a written record of agreements in principle and the shared aspirations of the family, they can be helpful evidence of the family's intentions.
The process of putting together the family charter provides a structured mechanism to debate the main issues that are likely to cause difficulty and conflict during the life of the family business. They are therefore often a catalyst to effective communication, which is key to the long term success of the family business.
Transition from one generation to the next can be an extremely challenging time for a family business. During those challenging times, it can be useful to refer to the family charter as a guiding document that clearly sets out the family's intentions for succession or any other governance event.
Anyone who dies without having made a will leaves an 'intestate' estate and the distribution of such estates can lead to unintended consequences. All family business owners and managers should therefore put a will in place and keep this under careful review. The preparation of a will is also an opportunity to undertake wider estate and tax planning. With careful consideration, it may be possible to understand whether tax liability could be mitigated and how this could be achieved.
For family business owners the position can be particularly complex. The family's wealth is tied to the business and, quite often, multiple businesses. The business' provision for share transfer on death (through its articles of association and/or shareholders' agreement) may contradict what has been provided for in a will, which can lead to confusion and, ultimately, a dispute over assets. This outs a strain on the family's finances and even relationships, and can result in the family losing focus on the business whilst it is engaged in trying to resolve the estate dispute. This can be avoided through effective estate planning.
Lasting Powers of Attorney
Family business owners and managers should also ensure they have a valid and appropriate Lasting Power of Attorney (LPA) in place. LPAs grant a trusted third party authority to manage the donor's property and financial affairs. This can include providing the attorney with the authority to pay the donor's bills, sell their property or investments and operate their bank accounts. LPAs can be particularly useful in the event that a family member who holds shares in the family business or still holds a management/board position loses capacity.
In the next three articles, we will explore each of these documents in more detail. For more information on these key documents, or for advice on governance or succession issues ore generally, please contact Emma Fordyce.