Family protocol

A family protocol is a document or contract where a set of agreements between family members are set out. Families that own a family business often need to establish the rules that regulate: their relations with the Company, the way to solve conflicts, hiring, how to achieve the continuity of the company over time…

The protocols seek to order, foresee and globally solve all the problems that can arise within the “family” business.

In conclusion, so the family business can survive for several generations -or that is the spirit-.

Characteristics

The notes that characterize a family protocol are:

• atypical legal business (insofar as it lacks specific and systematic regulation in our legal system),
• concerning a family business,
• plurilateral,
• inter vivos (it does not prevent the regulation of dispositions mortis causa),
• onerous (each party expects to obtain some advantages or attributions from the others),
• heterogeneous and complex contract,
• agreement outside the social contract (i.e. a parasocial agreement).

The family protocol is intended to be the backbone, a framework agreement that is not exhausted in itself.

It can be accompanied by other documents that make it effective. For example, marriage contracts, wills or the corporate bylaws.

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Family protocol format and content

The Family Protocol is subject to the general principle of freedom of format (articles 1278-1280 and 1667 of the Civil Code). Therefore, it may be formalized in a public or private document.

For its validity it is only required the concurrence of the essential requirements of any contract:

• Consent,
• object, and
• cause.

It is advisable that the protocol is adequately prepared and that:

• it is adjusted to the needs of the family business.
• is in accordance with current legislation.
• seeks its own usefulness, convenience and family support.

An ambiguous, generic protocol or one that does not adjust to the family needs will result in a useless and dangerous protocol. It will not help the family business to last, which is exactly what it is trying to achieve.

It is convenient (not obligatory) its subscription before a Notary. This is to accredit the identity and capacity of the grantors, the reliability of the date and the content of the document. Its content varies from one to another but in general they usually regulate the following matters:

• the business philosophy of the family or family group,
• the delimitation of the material and temporal scope of application of the protocol itself,
• the performance of the positions by the members of the family (access and exit),
• the governance and management of the same,
• the ownership structure of the company and the succession in the company,
• the economic-financial management of the company, in particular, the economic relations between the company and the family members involved,
• conflict resolution.

Publicity

Family protocols of non-listed companies may be registered in the commercial register.

Effectiveness of the Family Protocol

It will depend on the type of protocol, but most of the doctrine distinguishes in two categories:

• gentlemen’s agreements,
• contractual covenants (i.e., binding and generating rights and obligations).

In relation to the above, we have analyzed a recent judgment of the Supreme Court on family protocols.

Example of the case:

In essence, several siblings carried out movements of shares from one to another through sales, exchanges and donations. This caused the injured parties in this distribution to sue their relatives for considering that the signed protocol was violated.

The SC concludes that the protocol was an agreement designed on the basis of the future succession of the family company. It understands that the substantive issue is strictly legal. Concerning the interpretation of the 1983 family protocol. Confirming the interpretation of the family protocol made by the Court of first instance, with emphasis on the following aspects:

1. it is an agreement made in anticipation of the future succession of the family business. Although it exceeds a mere morally enforceable agreement;
2. the criteria for the distribution of the capital do not oblige the perpetual maintenance of these coefficients. This would be contrary to the law;
3. the family protocol does not include any prohibition of transfer of shares and participations by their holders. The challenged transactions of exchange, sale, purchase and donation of shares are valid. They are not prohibited by law or by the agreement;
4. Nor does the protocol impose the impossibility of dismissing directors.

The cassation must be based on the infringement of substantive rules applicable to resolve the issues at issue in the proceeding. Precepts of a generic nature are not suitable  to justify an appeal in cassation for infringement of the law. This same doctrine is reiterated, among many others, in Judgment No. 43/2014 of February 5.

The Supreme Court considers that the original distribution was maintained “for many years in compliance with the agreement”. It was not a mere declaration of intentions between the parties. It understands that the purpose foreseen in the agreement was fulfilled. That is to say, the orderly succession after the death of the original owners of the companies.

If this article has been of interest, we also suggest you to read the following article published on our website: The effectiveness of shareholders’ agreements