By: Yasmine Omari, Senior Manager, Family Enterprise Consulting, Deloitte, Middle East
Increasingly families are recognizing the need to undergo a family governance undertaking and put in place a roadmap for the family and the business in the future.
This involves an exercise whereby family members work together to define their values, their mission and codify certain family business rules, which I have previously discussed here.
Beyond the content of the constitution we often receive inquiries about the process of drafting a constitution as well as its enforceability.
Is a family constitution only morally enforceable? Does it need to be supplemented with a shareholder’s agreement? If it’s not a legal document, then what purpose does a Family Constitution serve?
It is true that a shareholders agreement is a characteristically legal document – all shareholder agreements typically follow the same framework and include standard clauses around ownership and shareholding. To this extent they contain legally enforceable rules and contractual clauses surrounding ownership and governance.
While a family constitution also contains rules on ownership and shareholding, these are typically addressed from a family ownership perspective, covering values and beliefs, business principles, and the mission and vision of the family business.
This is imperative, as a family business is an interactive system comprising of (i) family, (ii) business, and (iii) ownership systems presenting complex relationships, both between and among family members and executives.
While the ‘morally’ guiding provisions of a family constitution may be difficult to enforce or make binding in a court of law, the remaining provisions can be effectively imposed and made binding.
A constitution, provided it follows the basic principles of contract law, is legally binding. Generally, the elements that make a contract legally valid are the making of an offer, its acceptance, consideration being exchanged, and a mutual intent to be bound.
Therefore, a constitution that is voluntarily signed by members of a business owning family having come together to make a set of promises to each other and reach mutual assent is a legally binding and enforceable bilateral contract
The mutual assent and voluntary signature of the constitution is a key component which contributes to its validity as a contract. As such, a participatory process is key when drafting a constitution – a constitution cannot be prepared by one or two members of the family and imposed on the majority. In such instances it would be void of the assent that should be voluntarily given by all parties to the constitution.
Family values and philosophy will inevitably influence the operation of the business and will likely lead to a different mix between what is ‘legal’ and what is right for the family business, as such the Family Constitution serves as a beneficial tool to address such an overlap.
To this end, the family constitution connects the dots between law and family ethics and values, serving as an enduring and robust legally enforceable contract.
The views and opinions expressed herein do not represent nor reflect those of Deloitte. Deloitte shall endeavor, as reasonably as possible, to screen such information which is obtained, to the best of Deloitte’s knowledge, from reliable source. As such, Deloitte cannot guarantee the accuracy of the information featured nor the validity of the opinions and/or analysis and interpretation expressed herein. Opinions, conclusions and other information in this interview/article which have not been delivered by way of the business of Deloitte are neither given nor endorsed by it.
This article contains general information only, and neither DME, DME affiliates nor any of Deloitte Touche Tohmatsu Limited member firms are, by means of this article, rendering any accounting, business, financial, investment, legal, tax, or other professional advice or services of any nature whatsoever. Information included in the article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. None of Deloitte Touche Tohmatsu Limited, its member firms, or its respective affiliates shall be responsible for any loss or damages whatsoever sustained by any person who relies on this publication.