Example of a Family Covenant – Part 1 of 2
Suggested format of a family covenant with different clauses, as may be relevant, part 1 of 2,clauses 1-8.
Explanation about the family structure, the relevant assets, the nature of the family business and the manner in which the structure is to be managed. In most cases, family assets are divided into the core business, being an active company/ies, on the one hand, and assets held by the family for investment purposes, on the other hand. You will find below a separate reference to each.
Define who is a “family member”, “founder”, “second generation”; what activity is considered to be the core business; which company/ies are part of the core business and which ones are for investment purposes; which assets are business assets and which are family assets.
3. Family values and visions; reasons for having a family covenant
What the family values, the family vision and aspirations are, examples:
- The core business as a source of long-lasting pride and income.
- The need to set up a principal framework for operation, also upon a change in needs.
- The wish to keep amicable relations within the family.
- Provide a framework for the growing family, not only for the day-to-day management but also as a means of dealing with conflicts and avoiding misunderstandings.
- Formulate exceptions, division of roles, and decision making processes.
- Assistance in distinction between management, ownership and family.
- Formulate rules and norms that reflect the commitment to the expanding family as well as the community in which we live, in order to provide an appropriate foundation for economic prosperity as well as independence for the separate core families.
- Allow common activity of the whole family, without impeding upon the independence of each member, and such member’s right to enjoy the family assets and the business profits.
4. Expectations of the future generation for the coming years
- Find a way to keep the family business active and allow for all family members that may be interested in participating in the family activities.
- Formulate the rights and obligations of family members that participate in the family business, and avoiding a situation in which being part of the business is taken for granted.
- Ensure that each family member that is interested in participating in the business is committed to the business and contributes his time and energy in this respect, while accepting and applying the decisions taken with respect to the family.
- Set out a decision making process in which the second generation takes decisions together with the founders.
- Incorporate into the family business the personal abilities and the important contribution of each member of the second generation.
- Formulate rules for the incorporation of the second generation into the family business.
5. Milestones following the signature of this covenant
We suggest setting precise dates or a time framework:
- Complete transition to good corporate governance – a separation between management and board of directors.
- Promote business plan with regards to the required organizational structure of new business.
- Decide what is the required organizational structure for the various business fields.
- Set principles for the transfer of ownership between the generations 1.
6. Safeguarding the economic security of the extended family
Consider the creation of a family fund to finance various matters; discuss the way such fund will be managed:
- The family will try to keep the balance between business and family issues.
- The legal structure and the division between the family assets and the business will be determined according to economic profitability.
- Business matters are to be discussed at the board of directors and/or at management level; family matters will be discussed at the family council (see section 14 in part 2).
- Business discussions are confidential, unless agreed otherwise.
7. Structuring the family assets
Review the family assets, divided into core business and investments, provide details on the core business and the ownership structure; set rules for future classification of assets, ownership structure.
8. Core business
Set rules about the ownership and management of the core business:
- The family will act, through its lawyers, accountants and counsels, to adapt the legal structure and the various company documentation to the rules set out in this covenant.
- from the founders to the second generation, and from the second generation to their heirs