WHAT IS A FAMILY COUNCIL?
A "Family Council" is an executive body created and established by a business family.
A Family Council enables a business family to agree and create governance rules and guidelines to regulate the interaction of the family and the business.
A Family Council may be comprised of senior family members, and may, in large families, be a "representative council" where separate branches of the family are able to elect and be represented by representative council members.
The Family Council establishes a separate governance forum
between the family and the business
WHY USE A FAMILY COUNCIL?
Business families at a certain point, usually when the 2nd generation contemplate a transfer of the business to the 3rd generation, become concerned that the succeeding generation may not be able to agree a common approach to control and governance of the business. Coordinating the interests of more than 20 family members (excluding in-laws) can become a significant challenge.
Therefore, business families in transition or contemplating a transition of the business have no immediate answer to the basic question: how will the family control the business across generations? How will the family deal with potential and actual conflict? Corporate law generally does not provide an adequate answer, if any.
Lack of agreed family governance rules is a major contributing factor in business failure.
A Family Council is specifically designed to address this weakness.
WHEN TO ESTABLISH A FAMILY COUNCIL?
A business family has four basic options when considering succession to the business:
- Sell the business and divide the proceeds;
- Liquidate the business and divide the proceeds;
- Split and divide the business amongst the family;
- Transfer the whole business to the following generation.
The first three options would not require a Family Council, the last option (option 4) would in a multi-generation family business benefit from a Family Council.
There is generally no set business value below which it is not advisable to set up a Family Council, much depends on the individual family circumstances. However, for family businesses valued at less than USD$150 million, a Family Council structured as a legal entity, with a formal administration framework, may not be cost effective.
ADMINISTRATION OF THE FAMILY COUNCIL
No two business families are alike, and therefore no two Family Councils are alike. The substantive administration rules governing the Family Council will reflect the individual wishes of the families involved.
With that said, families will, at minimum, need to agree the following:
- Council Member qualifications and requirements;
- process to elect or nominate Council Members;
- whether Council Members are subject to any term limits;
- whether Council Members are subject to any automatic removal provisions;
- voting rights;
- quorum requirements;
- general administration procedures;
- funding requirements and budgets;
- powers to establish sub-committees, working groups and special interest groups;
- Family Council yearly timetable and agenda protocols.
SUBSTANTIVE GOVERNANCE RULES
The Family Council is designed to provide a forum for the family to agree high level rules regulating family participation and involvement in the business as well as key strategic business activities. Therefore a Family Council may at minimum consider creating governance guidelines in relation to one or all of the following:
- terms on which family members may join the business;
- terms on which family members may be terminated from the business;
- terms on which legal action may be taken against family members;
- terms on which employed family members may enjoy "benefits in kind";
- whether separate rules should apply to in-laws;
- director appointments and removals;
- approval of annual business plans (and significant departures);
- income retention policy;
- dividend distribution policy;
- significant capital disposals;
- significant capital acquisitions;
- connected party and anti-avoidance rules;
- information rights;
- change of accountant;
- change of accounting treatment;
- change of auditor.
The information in this document is not advice of any kind but general information only and should not be relied on as legal advice. Kensington Trust Group recommends seeking professional advice on legal or tax issues affecting you before relying on it. While Kensington Trust Group tries to ensure that the content of this document is accurate, adequate or complete, it does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. Kensington Trust Group does not assume legal liability for any loss suffered as a result of or in relation to the use of this document. To the extent permitted by law, Kensington Trust Group excludes any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this document.