Model Family Covenant – Part 2 of 2

Suggested format of a family covenant with different clauses, as may be relevant, part 2 of 2, clasues 8-16.

Notes

Text that appears in square brackets (“[ ]”) indicate the writers’ clarifications, comments or recommendations.

(Cont., see part 1 for sections 1-8 of the Model Covenant)

9. Ownership and transfer of Company shares

[Review (and amend if necessary) ownership structure with regards to various share types]

  • Decide whether the family members that hold a management share can appoint themselves and/or anyone on their behalf to the board of directors
  • Set the value of shares held by the founders, in the event of their death or incapacity
  • Formulate the terms and procedures to be applied in the event that a shareholder wishes to sell his shares
  • Refer to cases in which
  • shares are inherited (e.g. living spouse receives same compensation as the deceased but loses management and/or decision taking right)
  • transfer of shares following divorce
  • transfer of shares to a family member]

10. Employment of family members

[Define who may take part in the management and control of the business and who may not, and under what conditions a family member who does not have ownership or managerial positions, can be employed by the company]

  • The parties to this covenant wish to qualify their children to work in the company and/or in its subsidiaries.
  • Every family member is allowed to work in the company for a certain period and [define period and salary]
  • [Define procedure for the acceptance of a family member for full time employment by the company, e.g., confirmation of the board of directors]
  • The salary of a family member must be confirmed by the board of directors following the recommendation of the direct superior of the said family member. The salary has to be in line with the average working wage, and will subject to the recommendation of the direct superior of the said family member.
  • Insofar as the Company shall need to employ service providers that are not in the main field of business of the Company (lawyers, accountants, computer persons etc.) preference shall be afforded to the employment of service providers from within the family, subject of course to their suitability to the position and the required service. Without derogating from that set out above, it is hereby agreed that every person from the family that shall desire to provide services to any of the Companies shall be required to present his candidacy for the provision of said services before the board of directors of the Company during the process for the selection of a service provider in which process other persons that are not members of the family are entitled to participate.

 11. Company expenses

  • As a rule, the CEO of the Company shall ensure that all of the managers of the Company shall not impose expenses that are not incurred for purposes of the business on the Company resources.
  • Matters which cannot be agreed, or that constitute an inherited conflict of interest will be decided by the board of directors.

[Consider adding a general policy as to ownership of vehicles, business trips, studies and education and vacation]

12. Withdrawals from Company / subsidiaries

  • The company will keep a register of the withdrawals of each family member
  • A shareholder that withdraws funds from the Company must report on such withdrawal to the Company bookkeeper by the end of the month in which the withdrawal took place.
  • Settlement of all withdrawals will take place once annually. [Decide whether such settlement shall include all withdrawals, withdrawals and purchases made out of Company/ies account/s and also whether such settlement includes all expenses or if living expenses, for example, are excluded]
  • The salary of each shareholder and the maximum sum of withdrawals will be decided by the board of directors annually, at the beginning of each year. [The said amounts will be decided while taking into consideration the family desires to live at a high standard of living as well as the financial situation of the Company, based on its performance in the previous year.]
  • [Set a date for an initial settlement of accounts, in which all the assets of each shareholder will be evaluated, including past withdrawals and the value of real estate and financial assets; decide when and how a shareholder can withdraw and access funds following the said settlement]

 13. Incorporation of holding companies

[Consider replacing direct ownership with holding companies, one for each family; set out ownership structure and terms for transfer of ownership]

 14. Family council

[Consider the constitution of a family council, include details about

  • Council Composition
  • Topics to be discussed at the council and/or under the council responsibility, e.g., philanthropy, family inheritance, irregular finance of a family member, family-community relations
  • Frequency of meetings
  • Membership in council
  • Quorum required for decision taking
  • Representation of an absent council member
  • Presence of non-family members in council meetings]

 15. Incorporation of family investment company/ies

[Consider incorporating one investment company that will hold all family investments that are not part of the core business and that are not private assets of any of the family members

  • Define the ownership structure and management of the investment company
  • Decide how investments are reviewed, accepted and executed.]

Amendment and updating the Covenant

  • [Define a certain time in which the covenant cannot be amended or changed
  • Define the quorum required for accepting a proposed amendment]
  • This covenant may be amended upon the initiative of any party to the covenant, provided such change was discussed in the presence of all parties.

In witness for the acceptance of the principles described above, we convened in * and signed this Covenant on this * day of *(month), 201*.

 

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