A Guide to Family Constitutions

Family businesses have a unique structure, where family members can be shareholders, beneficiaries under trusts of shares, directors or employees – or all or one of the above! Sometimes the family might not agree on how the business is run, or the role of individual family members. Having a written set of rules and guidelines can help the family resolve disagreements, as well as making the most of the benefits which family ownership can bring.

A family constitution (also known as a family charter) can help provide this structure as well as future-proofing the business and engaging the next generation of family members.

What is a family constitution?

Ultimately, what the constitution looks like will depend on the family and its aims and objectives. A family constitution or charter is a confidential document which sets out some guidelines to help the family make important decisions, reach agreement and resolve any disagreements.

It sits separately from the more formal statutory articles of association of the trading company or companies and focuses not just on planning for the business, but also on planning for the family and its relationships.

A family constitution can sit quite happily with family trusts which hold shares in the business. Trusts are themselves often used as part of a strategy to manage and minimise inheritance tax as well as to ensure control of future share ownership and distribution of profits or wealth from the business. The key is to make sure that your constitution works with any trusts or more formal articles of association of the business.

What does a family constitution typically cover?

The constitution can set out:

• Who is the family? Does it include spouses of family members, stepchildren or second families? At what age should “children” become involved?
• The family’s values, vision and commitments to the business
• How the next generation should become involved with the business and what happens should there be an unexpected loss of a key family member
• Rules on the passing down of the business to subsequent generations
• The process for the appointment of family members wanting to work in the business
• How the board of directors of the business interacts with the family – perhaps through representatives of the family – often referred to as a “family council”
• The circumstances in which the business may be sold
• How the business is owned between different branches of the family and the way any profits might be allocated between individual members and what factors will be considered when making those decisions
• The role of the family and the business in any philanthropic activities

The dynamic nature of a family constitution

Putting together a family constitution is as much about the process as it is the content; members of the family from different branches and generations should be involved in discussions so that there is widespread buy-in to the process and the development of the final document. The process itself can bring family members together and create a focus and interest in the family business.

Going forwards, it is important that the structures and processes set out in the constitution are implemented – so if the constitution provides for an annual family conference, that meeting should take place and meetings between any family council and the board of directors should happen in accordance with agreed timelines. Significant decisions should be taken in accordance with the framework of the constitution and the values expressed in it.

Once in place, the constitution should not be seen as a rigid or inflexible document, instead as circumstances change, the constitution should be reviewed so that it remains relevant and fit for purpose. The constitution itself can set out how and when it should be reviewed.

If you would like any advice regarding family constitutions please contact a member of the Corporate team.