Example of a Family Covenant – Part 2 of 2

Example of a Family Covenant – Part 2 of 2

Part 2 of Example of a Family Covenant

Suggested format of a family covenant with different clauses, as may be relevant, part 2 of 2, clausues 8-16.

9. Ownership and transfer of Company shares

Review (and amend if necessary) ownership structure with regards to various share types:

Decide whether the family members that hold a management share can appoint themselves and/or anyone on their behalf to the board of directors

  • Set the value of shares held by the founders, in the event of their death or incapacity.
  • Formulate the terms and procedures to be applied in the event that a shareholder wishes to sell his shares.
  • Refer to cases in which: shares are inherited (e.g. living spouse receives same compensation as the deceased but loses management and/or decision taking right).
  • transfer of shares following divorce.
  • transfer of shares to a family member.

 10. Employment of family members

(Define who may take part in the management and control of the business and who may not, and under what conditions a family member who does not have ownership or managerial positions, can be employed by the company).

  • The parties to this covenant wish to qualify their children to work in the company and/or in its subsidiaries.
  • Every family member is allowed to work in the company for a certain period and (define period and salary).
  • (Define procedure for the acceptance of a family member for full time employment by the company, e.g., confirmation of the board of directors).
  • The salary of a family member must be confirmed by the board of directors following the recommendation of the direct superior of the said family member. The salary has to be in line with the average working wage, and will subject to the recommendation of the direct superior of the said family member.
  • Insofar as the Company shall need to employ service providers that are not in the main field of business of the Company (lawyers, accountants, computer persons etc.) preference shall be afforded to the employment of service providers from within the family, subject of course to their suitability to the position and the required service. Without derogating from that set out above, it is hereby agreed that every person from the family that shall desire to provide services to any of the Companies shall be required to present his candidacy for the provision of said services before the board of directors of the Company during the process for the selection of a service provider in which process other persons that are not members of the family are entitled to participate.

 11. Company expenses

  • As a rule, the CEO of the Company shall ensure that all of the managers of the Company shall not impose expenses that are not incurred for purposes of the business on the Company resources.
  • Matters which cannot be agreed, or that constitute an inherited conflict of interest will be decided by the board of directors.

Consider adding a general policy as to ownership of vehicles, business trips, studies and education and vacation to the Family Covenant.

12. Withdrawals from Company / subsidiaries

  • The company will keep a register of the withdrawals of each family member.
  • A shareholder that withdraws funds from the Company must report on such withdrawal to the Company bookkeeper by the end of the month in which the withdrawal took place.
  • Settlement of all withdrawals will take place once annually. (Decide whether such settlement shall include all withdrawals, withdrawals and purchases made out of Company/ies account/s and also whether such settlement includes all expenses or if living expenses, for example, are excluded).
  • The salary of each shareholder and the maximum sum of withdrawals will be decided by the board of directors annually, at the beginning of each year. (The said amounts will be decided while taking into consideration the family desires to live at a high standard of living as well as the financial situation of the Company, based on its performance in the previous year.).
  • (Set a date for an initial settlement of accounts, in which all the assets of each shareholder will be evaluated, including past withdrawals and the value of real estate and financial assets; decide when and how a shareholder can withdraw and access funds following the said settlement).

 13. Incorporation of holding companies

Consider replacing direct ownership with holding companies, one for each family; set out ownership structure and terms for transfer of ownership.

 14. Family council

Consider the constitution of a family council, include details about:

  • Council Composition.
  • Topics to be discussed at the council and/or under the council responsibility, e.g., philanthropy, family inheritance, irregular finance of a family member, family-community relations.
  • Frequency of meetings.
  • Membership in council.
  • Quorum required for decision taking
  • Representation of an absent council member.
  • Presence of non-family members in council meetings.

 15. Incorporation of family investment company/ies

Consider incorporating one investment company that will hold all family investments that are not part of the core business and that are not private assets of any of the family members:

  • Define the ownership structure and management of the investment company.
  • Decide how investments are reviewed, accepted and executed.

Amendment and updating the Covenant:

  • Define a certain time in which the covenant cannot be amended or changed.
  • Define the quorum required for accepting a proposed amendment.
  • This covenant may be amended upon the initiative of any party to the covenant, provided such change was discussed in the presence of all parties.

In witness for the acceptance of the principles described above, we convened in * and signed this Family Covenant on this * day of *(month), 201*. https://rosak-law.com/

 

____________________

Signature

Click here for part 1 of this article
Avi Abramovich

Avi Abramovich

Rosak Law

Example of a Family Covenant – part 1 of 2

Example of a Family Covenant – part 1 of 2

Example of a Family Covenant – Part 1 of 2

Suggested format of a family covenant with different clauses, as may be relevant, part 1 of 2,clauses 1-8.

1. Introduction

Explanation about the family structure, the relevant assets, the nature of the family business and the manner in which the structure is to be managed.  In most cases, family assets are divided into the core business, being an active company/ies, on the one hand, and assets held by the family for investment purposes, on the other hand. You will find below a separate reference to each.

2. Definitions

Define who is a “family member”, “founder”, “second generation”; what activity is considered to be the core business; which company/ies are part of the core business and which ones are for investment purposes; which assets are business assets and which are family assets.

3. Family values and visions; reasons for having a family covenant

What the family values, the family vision and aspirations are, examples:

  • The core business as a source of long-lasting pride and income.
  • The need to set up a principal framework for operation, also upon a change in needs.
  • The wish to keep amicable relations within the family.
  • Provide a framework for the growing family, not only for the day-to-day management but also as a means of dealing with conflicts and avoiding misunderstandings.
  • Formulate exceptions, division of roles, and decision making processes.
  • Assistance in distinction between management, ownership and family.
  • Formulate rules and norms that reflect the commitment to the expanding family as well as the community in which we live, in order to provide an appropriate foundation for economic prosperity as well as independence for the separate core families.
  • Allow common activity of the whole family, without impeding upon the independence of each member, and such member’s right to enjoy the family assets and the business profits.

4. Expectations of the future generation for the coming years

  • Find a way to keep the family business active and allow for all family members that may be interested in participating in the family activities.
  • Formulate the rights and obligations of family members that participate in the family business, and avoiding a situation in which being part of the business is taken for granted.
  • Ensure that each family member that is interested in participating in the business is committed to the business and contributes his time and energy in this respect, while accepting and applying the decisions taken with respect to the family.
  • Set out a decision making process in which the second generation takes decisions together with the founders.
  • Incorporate into the family business the personal abilities and the important contribution of each member of the second generation.
  • Formulate rules for the incorporation of the second generation into the family business.

5. Milestones following the signature of this covenant

We suggest setting precise dates or a time framework:

  • Complete transition to good corporate governance – a separation between management and board of directors.
  • Promote business plan with regards to the required organizational structure of new business.
  • Decide what is the required organizational structure for the various business fields.
  • Set principles for the transfer of ownership between the generations [from the founders to the second generation, and from the second generation to their heirs].

6. Safeguarding the economic security of the extended family

Consider the creation of a family fund to finance various matters; discuss the way such fund will be managed:

  • The family will try to keep the balance between business and family issues.
  • The legal structure and the division between the family assets and the business will be determined according to economic profitability.
  • Business matters are to be discussed at the board of directors and/or at management level; family matters will be discussed at the family council (see section 14 in part 2).
  • Business discussions are confidential, unless agreed otherwise.

7. Structuring the family assets

Review the family assets, divided into core business and investments, provide details on the core business and the ownership structure; set rules for future classification of assets, ownership structure.

8. Core business

Set rules about the ownership and management of the core business:

  • The family will act, through its lawyers, accountants and counsels, to adapt the legal structure and the various company documentation to the rules set out in this covenant.

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Click here for the continuation of this article (part 2)
Avi Abramovich

Avi Abramovich

Rosak Law