At the same time, the interests of the other family members must be taken into account. In addition to economic, family, and inheritance law considerations, issues of respect and emotions often play a significant role here. It is not uncommon for these matters to require the involvement of a facilitator or mediator—in addition to legal and tax advisors—early on to clarify interests.
The larger the family grows across generations as a result of the division and proliferation of shareholder lines, the greater the challenges become in finding a unified guiding principle within the family for the continuation of the business and in maintaining continuity.
This is not merely a matter of the legal framework—specifically, the rights and obligations that the shareholders and managing directors of the family business should have, which are typically set forth in the articles of association and other contractual documents.
Rather, it is about the family’s need to define a shared identity as an entrepreneurial family, as well as a guiding vision for the future control and management of the family business.
For the purpose of developing and documenting these shared values, the so-called “family constitution” is becoming increasingly popular in the practice of family businesses. The purpose of such a family constitution is typically for family members to mutually agree on their shared identity and values as an entrepreneurial family—both in their relationships with one another and with the business.
In this process, consideration should not be limited to those family members who, as shareholders or managing directors, steer the course of the family business. Rather, the family as a whole should be involved in defining shared values and aspirations. The goal is to strengthen the sense of family, increase identification with the business as a family business, minimize the potential for conflict, and ultimately ensure the business’s continued existence as a family business for the future.
The content of a family constitution can be freely tailored and does not follow any mandatory template.
A family constitution often addresses the following topics:
• Definition of the family (and, consequently, the current and future parties to the family constitution)
• General family values (including those regarding relationships among family members)
• Corporate values and corporate culture (e.g., upholding tradition, preserving the company as a family business, commitment to social responsibility, fairness, respect, and independence)
• Principles of corporate governance and corporate objectives (e.g., characteristics of the company and its business operations, strategy, willingness to innovate, securing the company’s location, financing)
• Views on the role, influence, and significance of the family and individual family members for the company
• Guidelines for appointing management, including whether and to what extent management roles should be filled by non-family members in addition to family members
• Definition of persons eligible for succession to shareholder or management positions
• Agreements regarding transparency, communication, codes of conduct, and dispute resolution mechanisms among family members
• Provisions regarding the term of the family constitution and procedural rules (e.g., regarding regular meetings of family members)
The family constitution, adopted by mutual agreement, is primarily intended to create a moral bond among family members, which is documented by setting the family constitution down in writing. The extent to which such a family constitution also has or can have legally binding effect is a subject of controversy in legal literature and depends, not least, on the specific terms of the family constitution.
Even if the family constitution—for example, in the form of a non-binding declaration of intent —is intended to serve merely as a moral obligation, it should be noted that it may have legal significance, for example, in the interpretation of contractual provisions (e.g., the articles of association) or in determining the duty of loyalty owed by shareholders.
In general, the significance of the family constitution does not stem solely from its final written documentation. Rather, it is precisely the process of drafting—and continuously updating and modernizing—the family constitution that, through the family members’ in-depth engagement with its contents, the company, and the other family members, fosters a sense of connection and commitment to one another and to the company.
Acceptance of the jointly defined values and principles fosters lasting consensus—at least in terms of basic direction—and helps prevent disputes. By involving all family members—and not just the shareholders or managing directors of the family business—the family constitution can strengthen acceptance throughout the entire family, going beyond the articles of association and other related regulations.
To maintain consensus for the future and involve subsequent generations, the family constitution must be adapted from time to time to reflect specific circumstances. The resulting dialogue among family members also strengthens their bonds in the long term. An annual family day, for example, can serve as a regular institution in this regard and can also be established in the family constitution.
Not least because a family constitution—depending on how it is structured—may become fully or partially legally binding or at least have an indirect impact on legal matters, the drafting and revision of a family constitution should always be guided by a qualified legal advisor.
