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What Should Be Included in a Family Business Constitution?

November 24, 2020

By Robert J. Waine, Esquire

A Family Business Constitution helps to establish a shared vision for the family business and establish boundaries between family members in their different roles. Ideally established before issues arise, it can be a roadmap for resolving conflict among family members. There is no set rule for what is included in the constitution; it is up to each individual family.  The components should answer the questions that create conflict in a family and a family business.

The specific provisions of a constitution are unique to the family and the business, but a constitution usually begins with a statement or preamble relating to the mission, values, strategy and philosophy of the business as well as statements describing applicable history, life experiences and traditions. The remainder of the constitution then lays out rules and regulations to be used to govern how future generations should run the business and treat each other. These rules and regulations can cover any number of matters, including the following:

  1. Composition and rules of conduct for the governing bodies of the business (which commonly include a traditional board of directors as well as a separate advisory council made up of only family members).
  2. Leadership and succession plans.
  3. The hiring, compensation, evaluation and termination of employees who are family members.
  4. The identification, development, training, appointment, evaluation and termination of management and members of governing bodies.
  5. Policies relating to communications and disclosures between the business and family members.
  6. Processes and procedures relating to the resolution of disputes among family members.
  7. The rights and obligations of shareholders and provisions relating to stock ownership, including benefits available to family shareholders not active in the business.
  8. Guidelines relating to retirement, including retirement age and other matters.
  9. Stock buy-sell processes and policies (including detail as to certain triggers, such as death, disability and termination of a shareholder).
  10. Guidelines relating to the sale of the business or other exit strategies.
  11. Policies relating to premarital agreements and estate-planning matters.
  12. Policies regarding the provision of family financial support.
  13. Policies regarding ownership and management by non-family members.
  14. Procedures for amendment of the constitution.

By addressing how potential issues should be resolved before they occur, family businesses can maintain harmony and fairness among family members while protecting the business. If you have an interest in exploring whether a family constitution is right for your business, contact us online or call (412) 338-1169.

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