How to deal with disputes in the family business?

How to deal with disputes in the family business?

Sound Management and the Family Business

A Family business is the pillar of family assets. A special attention should be given to it in a Family Charter. Who manages the Family Business? Family members and/or others? They may be assisted by consultants and advisers. How are Family directors and officers appointed? Are they remunerated? If yes, what is their legal status? Are they employees of the Family? How to remunerate them? The Family Charter should provide answers to these questions.

An intricate matter not to be ignored when drafting a Family Charter, is to clarify and set out the management roles of Family members and of non-Family members. Who will manage the Family Business? A Family member? An outsider? What are the prerequites for a Family member to sit on the Board of the Family Business? Are young Family members admitted to play a part in the management of the Family Business? On what conditions? How are the Family Business managers and/or directors remunerated? How to evaluate their performance? How are shares in the Family business transferred?

The easiest way to approach these matters is to assimilate the Family to a legal or a corporate entity, having its own existence and interests independently of its members. The reason for this approach is to set a tested framework for the purpose of managing the Family and its assets in the most professional and businesslike manner. Ultimately, the Family members shall benefit from such an overall unbiased management. Consequently, and as a result of such simulation, a Family may have a number of bodies to manage it. The Family Charter shall provide for a structure which may comprise of the following bodies:

  • A Family Assembly: It comprises of all direct Family members. Its operation and decision-making process follow the pattern of a general meeting of a company.
  • A Family Board: This board is the executive management arm of the Family. It runs its affairs. Its members are appointed by the Family Assembly from amongst Family members or non-Family members. As a matter of fact, the independent executive Board members play a crucial role within the Board, as their input and contribution are made without any outside influence or pressure.
  • A Family Council: It is the body that comprises of Family members elected by the Family Assembly. In families, with a large number of members, it is more practical and more efficient to have a Family Council. In its capacity as the Family’s representative, this Council deals with Family matters on behalf of all Family members. The Family Charter shall set out the role and powers of the Family Council. Its most important role is to inter-act between the Family Assembly and the Family Board.
  • Family Committees: These are specialized committees comprised of the Family members who share common interests. Relevant matters of concern to the Family may be submitted to them for perusal and issuance of related recommendations.
  • Family Office: This appointed body runs the Family day-to-day affairs. It implements the Family Board decisions. Typically, it consists of administrators, legal counsels and fund managers. Family Office executives are recruited on the basis of their education, skills and experience. Their main task is to tend to the needs of the Family and its members in all respects. Family Office services range from concierge services to the provision of highly technical financial and legal advices and opinions, which cover current or contemplated investments of the Family.

Mismanagement

A family business, just like any other business, is exposed to the mishandling of its affairs, and the mismanagement by those who have been entrusted with the same. Such mismanagement may materialize in a number of ways, and may be attributable to a number of factors: a Family officer acting intentionally, or negligently, or simply omitting to act when his/her action is required; or to the lack of skills required for the job.

The easiest way to assess the performance of a Family business directors, officers and executives (hereinafter “a Manager” or “Managers” as the context dilates), is to assimilate such business to a corporate business. The duties, in particular the fiduciary duties, laid upon a Manager are no different than those laid upon their counterparts in corporate concerns. Governance, in its widest sense, is equally required in Family businesses.

Family Office Managers are similarly bound by the duties of care and loyalty. Their fair dealings, on behalf of the Family, is not a virtue, but a genuine duty. They should exercise generally recognized best practices, in good faith, using sound business judgement at all times. The fact that a Family Office Manager is at the same time a Family member, elected, or designated, to assume a managerial function, does not exonerate him of such duties.

  • Liability and Accountability: We are inclined to consider a Family member, who is in charge of managing a Family business, more at fault when violating governing regulations, in-house or otherwise, such as laws and official directives, than if “strangers” to the Family perpetrate the same wrongful act. The blood and “next-of-kin” bond with those the wealth of whom have been put in a Manager’s hands, creates, somehow, a type of a personal charge that does not exist in concerns managed by people who do not have such relationship. As we know, a court of law, looking into a matter brought to its attention, may very well award damages to the Family resulting from the misperformance of a Manager. In the event of criminal wrongdoings, such member may, in addition to the payment of a monetary fine, be sentenced to confinement in jail.
  • Disputes with a Managing Family Member: Is a dispute that arises between a Family member, who holds an executive function in the Family Office, or in any other concern owned or controlled by the Family, and the managed entity considered a Family dispute? There are two possible ways to look at this intricate matter, which occurs quite frequently in Families, let alone in Family businesses. If we consider the dispute as a Family dispute, in some cases, other Family members may take sides and support the Manager whose performance is being questioned, against other Family members who challenge such performance. Some of these disputes end up creating cleavages among Family members, and may result in deadlocks that are detrimental to the Family business and could threaten its continuity. The more reasonable approach could be to consider the dispute as being simply a professional dispute; the route cause behind it should be assessed in an objective way, as if the Manager in question was a total stranger to the Family. A common wrongful act by Family Office executives, who are members of the Family, is what we refer to in corporate law as “self-dealing”. This type of dealing consists of the Manager causing the Family business to transact with a related party, thus creating a conflict between the interest of the Family and the personal interest of the Manager. A typical illustration of this conflict is when a Manager reaps financial, or reputational benefits, on the account of the Family business and, consequently, the Family members.

Family Finances

The Family Charter provides also for the management of Family funds, as well as for the rules governing their spending and distribution. The Family Board sets the strategies for the achievement of the Family financial objectives within guidelines normally set by the Family. It also provides for the regular financial reporting to g members (annual, quarterly, monthly). This reporting helps keep all Family members abreast of the performance of Family liquid and non-liquid assets and help them plan their own individual finances and investments.

Settlement of Family Disputes

Disputes among Family members are inevitable, especially when they share the ownership, and/or participate in the management, of a Family business. A well thought Charter addresses all possible controversial issues that may arise within the Family and is, in this respect, a mitigator of Family disputes, and a reducer of their frequency. It helps settle such disputes to a large extent. These disputes normally arise as a result of unclear situations. All members of a Family may not agree on the way profits realized by the Family are to be disposed of.

A Family Charter usually addresses financial matters, such as the acquisition and preservation of valuable assets, the maximization of the return of such assets. If the management and disposal of these assets are regulated, the occurrence of disputes over them is automatically reduced. Having said that, neither a Family Charter nor any other type of documents may prevent or help avoid acute Family disputes.

It is only the will and determination of at least one, or one clan, or one branch of the Family members who are in dispute, that are likely to minimize the adverse consequences of the non-settlement of the disputes, not only between or among them, but mainly on the Family as a whole. This may require concessions to be made. These concessions will prove to be precious gifts to the Family.

The Charter sets out a whole procedure for the settlement of the Family disputes: how to initiate the process? Who, or which body, to submit the disputes to? Arbitration by an arbitration panel? Private arbitration? Or, in a worst case, litigation before a specific court? https://lb.linkedin.com/in/saba-zreik-13122a18

family business

Saba Zreik

Manal Consultancy

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How is a Family Charter drafted?

How is a Family Charter drafted?

Drafting a Family Charter

The drafting of a Family Charter is not a difficult task, as long as its author is fully aware of what to provide in it.

The best Family Charters are those that the largest number possible of Family members contributes to. Participating in the drafting of a Family Charter, or contributing to its contents, is an important step that is indicative that the participant, or contributor and, of course, all Family members who sign it off have the intention to abide by its provisions.

The Charter is the baby of those who bring it to life. They will cherish it. The best way to tackle this task is to select, from the items addressed in the above sections, and other items that are of relevance or concern to the Family, those to be dealt with in the Charter.

The first draft of the Charter shall consist of provisions to be submitted to the Family members and circulated to all of them, through the “head” of the Family, or its patriarch, or through any other member who launches this project, if a different person. The initiator shall preferably own the assignment to manage the whole process, unless another person is found to be more appropriate to assume this task.

Once all comments are received, a second draft may be generated and circulated, in anticipation of a meeting to which the largest possible number of Family members will be invited to attend, in order to sign off the execution copy of the Charter; if there is no final agreement, many subsequent drafts may be required in order to reach a real consensus.

All discussion sessions are supposed to be open ones; each attending Family member being allowed to bring in new ideas and raise issues, opinions, concerns etc. The person leading the discussions about the Charter should always keep the participants in focus and aligned, to the extent possible, with the interests of the Family in mind.

The main objective of the Charter is to set a roadmap, not only for the existing and participating, or even non-participating, Family members, but more importantly for the future of the Family and those of its future members who are not born yet.

Family members should be allowed and even encouraged, if they so wish, to seek outside professional advice on any particular matter to be dealt with in the Charter. While the size or length of a Charter does not necessarily suggest the weight that such Charter carries in terms of clarity, we believe that a great deal of details ought to be included in a Charter to make sure it is comprehensive enough and does address all concerns.

Amending a Family Charter

Family Charters are not set in stone and need to be looked at as living frameworks, to be updated, as and when appropriate. While they may stay with the Family for many years to come, a great number of the variables that they will have been drafted under or along are doomed to change over the years.

These relate to the evolution that the world and the Family, invariably and continuously, witnesses. These variables affect the regulations and laws, societies and social units with what it entails in repercussions on the Families and their businesses. Family Charters have to follow. This is why the drafting of the Family Charter ought to adopt great flexibility in order to avoid any deadlocks in their implementation or amendment.

Withdrawing from a Family Charter

There are various reasons for leaving the Family business. The most common one being the wish to be independent, using his/her share of the Family wealth to create and develop own business. There are other reasons such as disagreements with Family members, or with the way the Family Office is being managed, or the Family wealth invested

One other reason is the ipso facto retirement resulting from the death of a Family member and the unwillingness of his/her heirs to continue in the Family business, or to join the Family Charter, and this even if the latter does provide for such situations. The real question is, since getting out of a Family charter does not mean getting out of a Family, the conduct of which the Charter is supposed to govern, can a Charter be still enforced on the retiring member?

The simplest answers is that all provisions of the Charter, which are of a monetary nature, such as investment and divestment of Family funds and distribution of Family funds, should remain in full force and effect vis-à-vis the retiring Family member.

The only exception will be in the event, by mutual consent, or by application of the Charter itself or similar document/agreement to the same effect, the assets attributable to the retiring member are automatically liquidated. As for the non-monetary provisions, I do not believe that they can be enforced on the retiring Family member. In all events, it will be wise, if not already included in the Charter, to regulate a Family member’s retirement in an addendum to it. https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb

family business

Saba Zreik

Manal Consultancy

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Introduction to Basic Family Charters

Introduction to Basic Family Charters

Introduction to basic Family Charters

There are some frequent questions that are raised by researchers when looking into a specific matter. Some of them seem to have obvious answers when, more frequently than not, this is not the case.

What is a Family?

A Family is a group of individuals having in common a blood bond, or a kin relationship, derived from marriage or adoption. All civilizations across the globe have allocated a special place to family clusters or units. However, and for a number of reasons, not the least being the rather permissive mode of living in the West, children, after having attained the maturity age, leave their parental home and become, in a certain way, and to a certain extent, independent.

They participate in family gatherings every now and then, celebrate religious and other holidays together, just about what, and in some cases the bare minimum, that is required to keep their relationship with their parents and siblings.

Exceptions may be found in business dynasties, but the reason is mainly attributable to the need to preserve family wealth, by promoting closeness among its members, more than to the sense belonging to the Family per se. However, the meaning of a Family, in the Middle East for instance, has an extra moral dimension.

The larger a Family is, the strongest it is believed to be. This strength is consolidated by the fact that the children of the Family do not normally leave their parental home other than when they get wed; and once they do that, they keep returning home and inter-acting with the Family members on a very regular basis.

A Family is thus a social unit, consisting of parents and the children they raise. This is an obvious definition. However, in the business world we have seen extended families comprising of not only blood members. While in-laws admitted in the Family are not typically considered as Family members in the strict sense of the word, we have come across families where sons and daughters-in-law, or daughters and sons-in-law, have either been involved in the Family business or been given the opportunity of benefitting from such business, to an extent that justifies making them part of the business Family. Some other Families have expressly excluded non-blood Family members from the Family business and affairs.

What is a Family Charter?

Most Family businesses are governed by unwritten understandings, rules or tacit agreements governing their day-to-day running, their targets for the future, and how they anticipate the next generations will become involved.  However, just like any unwritten arrangements, these are likely to generate disputes and conflicts over ambiguous and unclear matters.

A Family Charter is a written statement of intent, or arrangement entered into by the Family members in relation, most of the time, to a Family business, other assets or Family matters in general. A Family Charter is also defined as the Family’s constitution, or protocol, handling the ownership, operation and disposal of the Family business and other assets. It is also a statement of agreed values, aims and relationships regarding the assets commonly owned by the Family members.

Who needs a Family Charter?

Families with no substantial wealth, let alone unwealthy families, do not really need to go through any lengthy procedures to ensure that the value of the assets they leave behind is preserved, protected and maximized as the years go by. However, the patriarchs of wealthy and high net worth Families do have a legitimate concern regarding the future of their business which they will have spent decades building, not only for them but also for their descendants.

Family Charters are mostly needed in families who have a substantial operating business. Not only members of the Family, who are directly involved in a Family business, need a Family Charter, but also, and maybe more importantly, those who are not involved. The latters feel more comfortable knowing that the Family wealth is being managed, with transparency, under proper governance and according to solid structures and principles.

Is the Family Charter Enforceable?

  • A Family Charter is unlikely to be a legally binding document. You may view it as more of a mission statement for a Family, or for a Family business with which Family Charters are frequently associated.  It may include, in addition to more easily assessable tangible provisions, a statement of values and ethical guidelines that are insufficiently precise to be enforced or, if violated, are not subject to any accountability. Having said that, and although a Family Charter is not, on the face of it, a perfectly legally binding document, it contains several provisions which reflect the consensus view of the Family stakeholders on specific matters. It should be viewed and assessed in the context of the overall framework of governance for the business, supporting the business plan drawn-up for the Family.
  • One way to ensure the enforceability of a Family Charter, and to convert what are moral obligations into legal duties, is to make the Charter as close as possible to a binding contract. If every Family member contributes to the Family Charter by attending the meetings held to discuss it, voicing their ideas and concerns, negotiating with other Family members, and agreeing with them on its terms. If all such members sign off on it, the Family Charter becomes a contract, and will thus be enforceable as such.  If rallying all Family members around a legally binding Charter is impossible, for whatever reason, then the most important provisions of the Charter may be embodied in one or more separate deeds, to be signed by all or some of the Family members. The notarization, or other types of authentication of the signatures, reinforces the enforceability of such deeds. Needless to add that only those of the Family members who will have signed the deed shall be bound by it.  https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb
family business

Saba Zreik

Manal Consultancy

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High net worth family charters, protecting family and wealth

High net worth family charters, protecting family and wealth

A Family Charter should not be looked at as a piece of literature to work on, perfect and store in a drawer. It has a specific use and it should address a minimum of critical and important matters of concern to the family.

What is the Role of a Family Charter?

  • A Family Charter will help reduce any future frictions among family members. It entices them to keep the bond on, and the business in the Family; and provide them with a taste of the ingredients that have been behind the success of the business in the past, hoping that they will follow suit and that the generations to come will perpetuate such success and secure a stream of income to the Family members year after year.
  • It is by all means a Guide; a guide that provides directions for Family members with respect to the Family business and assets, addressing all their aspects and suggesting roadmaps to follow for the achievement of the Family objectives.
  • It is also a Family Bonding Agent. The earliest a Family Charter is entered into by Family members the best. It is essential that they do that at a time when the least issues are pending among them, so that they feel relaxed when attending meetings and going through discussions to address all matters of concern, with an open spirit, realistic approaches and a determination to reach a consensus over all topics to be included in the Charter. It builds a bond among the Family members and enhances the solidarity that is so crucial to the perpetuation and consolidation of such bond.
  • Governance rules and principles are no longer the privilege of, or the requirements in, listed corporations. They are useful in unlisted corporations and even in private companies and also, why not, in NGOs, and Families. A Family Charter is a Family Governance Organizer. In fact, it is a genuine governance tool. It addresses aspects regarding the functioning of a Family, its meetings, decisions, etc… It is a framework for Family members’ inter-actions. A Charter set for the Family members is a forum to exchange ideas and opinions and take decisions over issues and matters of mutual interest and concern, in an orderly and conclusive manner. A proper governance in running the Family affairs yields excellent results; it encourages and instills transparency and openness in administering the Family assets.
  • It is also a Succession Planner. It helps Family members plan their way forward. What are the Family bodies? Who manages them? How will the Family manage its succession? How will the assets be devolved once a Family member passes away? Who will get what? Moreover, which branch of the Family shall, if any, be entitled to lead? How does the control of a Family operate?
  • It can also be a Complementary Arrangement to more formal documents. In the event all or some of the Family members have already entered into some types of more formal arrangements, regulating their common business or assets; such as articles of association of their jointly owned companies; or shareholders agreements, etc…they can provide in the Family Charter for all items that have not been addressed in such documents. A lot of small details may not be appropriately set out in organizational documents that are typically public documents, and/or documents that are required at public official departments. Family secrets are better kept in side documents to whom only a limited number of persons have access. Hence, the Family Charters are ideal venues to house such secrets.

What are the Contents of a Family Charter?

Family Charters may never be identical, due to the fact that they are reflective of contents and concerns that are not unique, and are sometimes very different depending on the families, their belongings, creeds etc…. Below are some of the items that may be included in Family Charters; each Family may pick and choose, amend, add and cancel as best fits its particulars and specifics:

  • Family Vision and Mission Statement: Setting out, from day one, the Family Vision and Mission Statement helps the coming generations to use them as guidelines so that the main focus set by the main settlor, to become with the years an ancestor, is not lost over the years. The Family Vision is a genuine compass to show the way to the Family members and, more importantly, to tell them every now and then how far off they are from the borderlines that the Mission Statement will have drawn, as well as from their destination.
  • Family History: It will be interesting and rewarding for the descendants in the Family to know where their ancestors came from, where are their roots. Therefore, the Family Charter may elaborate on the Family background, setting out, when possible, a Family tree and, where applicable, a list of those Family members who have left their prints in the Family, in their community and in their country. Family history is probably the most unique and distinctive feature of what Family members have in common; it is made of ancestry, legacy and heritage.
  • Family Values: Moral, economic and political values may be included in a Family Charter, such as: Faith, Solidarity among Family members, Solidarity towards the public at large, Philanthropy and Charity, Patriotism and Nationalism, Integrity and High Morals, and as many other values as the culture of the Family wish to have embedded for its members to live by. One of the real values that seems to be overlooked by Family members, which needs to be mentioned in their Charter, is the “Health and Safety”. Needless to say that the COVID-19 pandemic, that changed the world, rings a loud bell. Members of the Family ought to organize, in a scientific way, the care of their own health. H&S directives are best reminders of their importance when built in a Family charter. The healthier Family members are, the better their performance is.
  • Family Assets and Family Business: Family Charters deal extensively with Family assets. These are of many types, depending on the Family’s wealth magnitude and investment policies and strategies. A comprehensive assets portfolio typically includes productive corporate assets, non-productive corporate and non-corporate assets, liquid assets and any other type of movable and immovable assets. Family Charters address the assets matter in terms of their ownership, preservation and maximization. What assets to acquire? to keep? to protect and how? what assets to dispose of and when? Family Charters may also stipulate that some real assets may never be sold, but rather leased out in order to generate income to sustain Family expenses.
  • Miscellaneous: In addition to the above, the Family Charter may include other topics, such as guidelines for charitable and philanthropic endeavors; Family members’ health care; Succession Planning, grounds for the amendment of the Family Charter and procedural means and ways for effecting such amendment, as well as any other matter that a Family feels that it needs to be raised or regulated in the Charter. https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb
family business

Saba Zreik

Manal Consultancy

-