2 Holler (2018); Holler (2020), Hennerkes and Kirchdörfer (1998); Scherer et al. (2012); Ulmer (2010a); Ulmer (2010b); Bochmann and Scheller and Prütting (2021); Vogt et al. (2017); for Austrian law Kalss and Probst (2013).

3 Holler (2018, p. 557); Holler (2020, § 75 para. 5 and 84 et seq.); focusing on succession law and planning in family businesses Holler (2021a, 2021b).

reduction of shareholder compensation claims in order to avoid liquidity outflow relating to crucial exit occasions.4

These various regulations on different legal levels must be well coordinated. They must fit together and mesh. Inadequate regulation and a lack of interlocking of such regulation can endanger the family business and is one of the typical reasons for conflicts (Holler, 2018, p. 558; Sigle 1994, p. 459).

There are various legal limitations in German corporate law, making an adequate and legally certain design with regard to these typical family businesses characteristics such a challenge that there has been a call for a "special law" (*Sonderrecht*) for family businesses comparable to the "special law for public partnership companies."5

#### *17.2.3. Tradition of the Family Business, Values, and Goals*

These typical characteristics are the mission to preserve the company and its character as a family business in the long run. They can be summarized as the tradition of the family business, including its values and goals (Holler, 2019a, p. 883). They are an expression and consequence of the tradition of the family business as determined by the founder and the values and goals that this individual has designated to be the "program" for the following generations (Holler, 2018, p. 558 et seq.).

#### *<IP_ADDRESS>. The Founder's Will and Tradition*

The founder's will and tradition are the origin and basis of the family business and its legal statutes as provided by the founder, which is relevant and at least in partnership law can even be decisive for both the content and the interpretation of a partnership agreement (Holler, 2018, p. 558 et seq.).

*<IP_ADDRESS>. Legal Significance for Interpretation and Content of Family Business Statutes* The founder's will is the very beginning of every family business. In jurisprudence, the visions of the founders have been summarized as the "tradition of the family business" based on the founder's will.6 Courts have determined such tradition of the founder to be responsible for the content and interpretation of the partnership agreement. It is therefore the founder's will and tradition as incorporated in the corporate membership that is to be passed from one generation to the next (Fig. 17.1).

4 Ulmer (2010, p. 552); Holler (2018, p. 558); pointing out the specific effect of corporate law on family businesses Habersack (2020, p. 2093).

5 See Holler (2019a, p. 882); Holler (2018, p. 558); Ulmer (2010, p. 549); Ulmer (2010, p. 805); Binz and Sorg (2018, § 6 para. 178); see for discussion and ample references Holler (2020, § 75 paras. 25 and 79 et seq.); critical Lieder (2017, p. 59); Holler (2012, p. 719ff.); Lieder (2021, § 3 paras. 115ff.); Fleischer (2017, p.1201); explicitly against any special law (Sonderrecht) Bochmann and Scheller and Prütting (2021, Einf. Vor § 1 paras. 6 et seq.) ("Kein Sonderrecht der Familienunternehmen").

6 Cf. Higher Regional Court of Hamm (OLG Hamm), decision of 3 November 1999 in case 8 U 220/98, NJOZ 2001, 170 and decision of January 17, 1991 in case 15 W 428/90, NJW-RR 1991, 837, 840; Holler (2018, p. 559).

### *17.2.4. Great Diversity of Legal Forms of Companies*

There is a great diversity of company legal forms that the family can choose for their family business (Holler, 2020, § 75 paras. 56 et seq. and 64). And there is not solely one suitable legal form. The selection in the individual case depends not only on the business demands of the company, but especially on the succession situation within the family (Holler, 2020, § 75 paras. 72 et seq.; Lieder, 2017, p. 62).

#### *17.2.5. Architecture of Family Business Providing for Different Corporate Levels and Statutes*

#### *<IP_ADDRESS>. Not Only Articles of Association, But Different Corporate Levels*

Quite often, the internal corporate organization is not limited to the articles of association of the family business itself, although such articles are in general the fundamental place where this organization is stipulated (Holler, 2020, § 75 para. 87 et seq.). The architecture can be rather complex and eclectic. It has been compared with the structure of an onion, thus having different layers ("*Zwiebelschalenmodell*") (Fleischer, 2016). Such an image, as accurately defined by *Fleischer*, is attractive also because the corporate structure of a family business in the individual case is a "grown structure" – with the family business usually providing for a closed shop of family shareholders only (Holler, 2020, § 75 paras. 20 and 38 et seq.); it has grown with the family from generation to generation and therefore is multilayered and complex in many respects.

The corporate structure of a family business frequently provides for different corporate levels and statutes for different purposes.

#### *<IP_ADDRESS>. Shareholder Agreements*

Family shareholders often agree upon a shareholder agreement for different reasons (Holler, 2018, p. 559, 2020, § 75 paras. 86 et seq. and 132 et seq.; Kalss & Probst, 2013: paras. 4/2 et seq.). One important motive is that these agreements, in contrast to the content of the company's articles of association, do not have to be disclosed to the public or filed with the commercial register (Holler (2020, § 75 para. 87). Additionally, shareholder agreements are more flexible than the articles, as their content, changes or amendments do not have to comply with form requirements or the formal strictness of the articles in stock corporation law.7

**Individual and versatile content.** The content of shareholder agreements of family businesses is individualized and versatile.8 Shareholder agreements often contain pooling agreements in which a group of shareholders (for example, a family branch9 ) concentrate their votes to maintain a certain influence on the family business either in general or regarding specific matters and affairs. Families often provide regulations with regard to the composition of the management and advisory boards as well as profile requirements for their members. The definition is one of the crucial issues, and regulation requirements in family businesses are vulnerable to internal conflicts since the family must determine (i) whether or not family members are to be members of the management or supervisory board and (ii) the social and professional qualities required. Other clauses typically provided in shareholder agreements are regulations governing the transfer of shares (for example, transfer restrictions, exit regulation and – in large companies – regulations for an internal share transfer market).

**Legal qualification – company under civil law.** As far as the legal qualification is concerned, such shareholder agreements themselves usually serve under German law to constitute companies under civil law pursuant to section 705 German Civil Code.10 Therefore, there often exist other company statutes and other corporate levels beyond the corporate entity of the actual family business, each with its own corporate life and decision-making processes that need to be well coordinated in practice.

**Consequences for corporate design practice.** The parallel coexistence of various corporate levels requires careful design and drafting so as to achieve an interlocking regulation that meshes and fits together smoothly. Various designs for these companies within the family business structure are possible.

The relatively easiest variation is where the participants and shareholders of both companies – family company and civil law company – are identical. We call this an omnilateral shareholder agreement.11 If the family shareholders only partly become parties, we speak of a fractional shareholder agreement.12

7 Sec. 23 para. 5 German Stock Corporation Act (AktG).

8 Wicke (2021, § 18 para. 4) ; Wicke (2022, para. 132); in detail Hoffmann-Becking (1994, p. 444); Holler (2018, 559 et seq.).

9 For more detail on the organization of family branches and their legal implications, Holler (2020, § 75 paras. 91 et seq.); Fleischer (2019); on the criticism of the family branch principle, Kormann (2012, chapter 6 paras. 4 et seq.).

10Ulmer and Löbbe (2013, § 3 paras. 119 and 123); Holler (2020, § 75 para. 137 and in more detail paras. 132 et seq.); Holler (2018, p. 560); Wicke (2021, § 18 para. 6).

11See in detail, Noack (1994, p. 33); for the Limited Liability Company (GmbH) Ulmer and Löbbe (2013, § 3 para. 120); Holler (2018, p. 560).

12Noack (1994, p. 33); for the Limited Liability Company (GmbH) Ulmer and Löbbe (2013, § 3 para. 120) Holler (2018, p. 560).

#### *232 Lorenz Holler*

Rather often, not all of the family shareholders are parties to the shareholder agreement for different reasons. If the family is divided into family branches and the internal relationship between the members of such family branches is not regulated within the partnership agreement or articles of associations, each branch will conclude its own shareholder agreement (family branch statute).13 If there are third-party shareholders who are not members of the family, the family often will conclude a shareholder agreement in order to bundle family influence on the family business, thereby providing restrictions on voting rights in the shareholder meeting, which is called a pooling agreement or protective association agreement (*Schutzgemeinschaftsvertrag*).14 Sometimes there are two or more families who do the same. Together they conclude a multi-family shareholder agreement.

#### *<IP_ADDRESS>. Shareholder Resolutions*

Another level of regulation is established by shareholder resolutions (Holler, 2018, p. 560). Typical subjects of shareholder resolutions – as in usual, non-family businesses – are rules of procedure for the board of directors, the advisory council, and/or the shareholders' committee. But families can also decide to agree upon sensitive issues not being regulated in the articles of associations but in a shareholder resolution, especially with regard to family issues in relation to the company (Holler, 2018, p. 560).

*Example: There was a member of the family who was a shareholder who wanted to buy a product manufactured by the family company. As a legal transaction with a shareholder, the transaction required a shareholder resolution with a majority of 75% of the voting capital as provided by the articles of association. The shareholder concerned by the transaction had no voting right.*15 *Since there was a severe conflict in the family as well as a shareholder dispute, the respective shareholder of the other family branch – in protest and on principle – did not agree. The legal transaction had to remain uncompleted. Some months later, this purchase-seeking member of the family discovered a long-forgotten shareholder resolution buried in oblivion that had been passed 20 years earlier and that provided detailed regulations stipulating specific conditions for product sales to family members and family shareholders. The management was entitled to execute the transaction on the basis of such shareholder resolution.*

As this practical example illustrates, families can regulate their tradition and interests in relation to the company by means of shareholder resolutions, which are insofar an appropriate instrument.

13For more details, see Holler (2020, § 75 paras. 91 et seq.).

14For further details, see Hoffmann-Becking (1994, p. 442ff.); for a sample pool agreement among shareholders of a listed stock corporation, see Löbbe (2012, chapter 5.01 paras. 1 et seq., pp. 463 et seq. and chapter 5.02, pp. 494 et seq.); Holler (2018, p. 559f.).

15Sec. 47 para. 4 s. 2 German Limited Liability Company Act (GmbHG).

#### *17.2.6. Other Levels of Regulations – Inheritance and Family Law*

There are other levels of regulation for family businesses and their members, such as inheritance and family law. Each family shareholder must ensure that his testament or contract of inheritance complies with requirements for the succession of shares to members of the family as provided by the family business statutes.16 Since the situation of succession within the family varies over the course of time and therefore constitutes a dynamic process, such compliance can be a challenge and requires continuous and careful monitoring in fact and law.17

Additionally, claims on the reserved portion of an estate (*Pflichtteil*), in the event of the death of a family shareholder, as well as claims on equal distribution of surplus (*Zugewinnausgleich*), in cases of divorce, can force the family shareholder to exercise the right to terminate the company and to claim compensation. Liquidity outflow caused by a claim of compensation can overstrain the financial means of the company and must be avoided (Holler, 2020, § 75 para. 312). Therefore, claims on the reserved portion of an estate as well as claims on equal distribution of surplus must be excluded by contract in each individual case by every single family shareholder.

Since such claims can endanger the existence of a family business,18 corporate statutes often provide clauses authorizing the shareholder meeting to decide on the exclusion of a shareholder that has neglected to exclude such claims by contract with his marriage partner and to provide evidence of having done so within a fixed time limit.19

Last but not least, precautionary powers of attorney are part of the law of family businesses.20 These are important precautionary measures for cases of mental illness or emotional, mental, or physical disability in which a family shareholder is no longer able to manage his or her affairs, especially the exercise of shareholder rights. Precautionary powers of attorney avoid legal guardianship, which is especially important to family businesses because any influence of third parties is often excluded by all means. Apart from that, guardianship can cause severe problems for the functioning of the family company, for the decision-making procedure in the shareholder meeting of the family business and for the exercise of shareholder rights.21

16Holler (2020, § 75 paras. 70 and 220 et seq.) ; see for the design of succession clause (Nachfolgeklausel) in corporate statutes of family businesses, Holler (2021a).

17Holler (2020, § 75 para. 70); regarding succession clauses (Nachfolgeklauseln) in corporate statutes of family businesses in detail, Holler (2021a).

18On the problem of the strain on liquidity in the context of corporate succession, see Mayer (2013, p. 75).

19Explaining such matrimonial property clauses in articles of association, Wenckstern (2014, pp. 1, 12f et seq.); for further detail, see Sanders and Rolfes and Hawickenbrauck (2021: 1797ff.).

20On guardianship and particular challenges, Langenfeld (2005, p. 52).

21Generally and for ample references, see Schäfer (2020, § 705 paras. 126 et seq).

# **17.3. Complexity in Law and Fact**

Complexity often is underestimated. Dealing with family businesses demands an awareness of complexity as regards each person involved. The complexity in terms of legal advice is multilayered and eclectic in law and fact (Holler, 2020, § 75 paras. 1 et seq. and 5 et seq.).

#### *17.3.1. Juxtaposition of Family and Family Business*

Family and the family business stand side by side in business reality. You cannot deal with the one without the other. In order to understand the business and its structure, you must know the family as well as the family tradition, including the family history, family conflicts, and family moral values.

#### *17.3.2. Emotions*

There often are emotions – and family members sometimes let them run free in the exchange of letters, shareholder meetings or negotiations. Emotions place high demands on each person involved, especially third parties, these including management who are not part of the family and professional advisors (Holler, 2020, § 75 para. 69).

In normal companies, such emotional and not exclusively rational behavior would be regarded as inappropriate or out of place. It may occur that family shareholders will start to cry or shout at each other during a shareholder meeting. However, if a sister shareholder insults her brother shareholder and acts in an offensive manner, this behavior will not necessarily have the same quality as the equivalent behavior among usual shareholders in normal and non-family business. Imagine the addressee of such behavior being the representative of a third party, e.g., a financial investor. In a family business, there are different standards, but no schematic solutions as far as the legal consequences where such behavior is concerned. Rightly, in the case law of the German Federal Court of Justice, fiduciary duties (*gesellschaftsrechtliche Treuepflichten*) of the family shareholder can be either more or less intensive, something which must be determined on a case-by-case basis.22 Specific characteristics of family businesses lead to specific standards for fiduciary duties of the family shareholder as well as the legal consequences in the event of their violation (Holler, 2012, p. 719ff., 2020, § 75 paras. 355 et seq. and 384 et seq.; Holler & Mann, 2021, p. 404 et seq.).

# **17.4. Conflicts Are Typical and Dangerous for Family Businesses**

Conflicts are both typical and dangerous for family business (Holler, 2020, § 75 paras. 67 et seq.).

22German Federal Court of Justice (BGH), decision of 9 December 1968 in case II ZR 42/67, NJW 1969, 793, 794, and the decision of December 12, 1994 in case II ZR 206/93, NJW 1995, 597; Schmidt (2016, § 140 para. 35).

#### *17.4.1. Special and Individual Characteristics*

Family thinking and family feelings, including emotional behavior, can prevail so much over family members that they are not able to make rational decisions in the affairs of the family business (Holler, 2020, § 75 para. 69). Such conflicts between family members or family branches are dangerous (Holler, 2020, § 75 para. 93). It is common sense that experience in corporate litigation outside family businesses suggests that shareholder disputes can even endanger the existence of a company. This is true for family businesses, too. Nevertheless, there are different rules for conflict resolution and (corporate) litigation at least in most of the entrepreneur families. This is a question of (dispute) culture and tradition and therefore – once again – very individual.23

Shareholders are not just business partners, but family. Whereas shareholders in normal, non-family businesses only see each other in shareholder meetings – and after their exit from the company they go their separate ways – this does not hold true for a family business. The family comes together outside of shareholder meetings and is connected by family ties (*Familienband*).24 The family ties will survive any business partnership or shareholder exit in the long term.

#### *17.4.2. Typical Reasons for Conflicts*

#### *<IP_ADDRESS>. Unanimous Votes and Individual Consent Requirements*

Unanimous votes and the individual consent of shareholders are often required in the structures of family businesses. Although a corporate adviser may try to avoid requirements of unanimous voting and individual consent because they can result in standstills and the blockage of necessary decisions, these crucial and challenging situations are typical in family businesses for different legal reasons:

**Section 709 German Civil Code.** As pointed out above, we often have to deal with civil law companies in a different regulatory context and on different corporate levels. Even if the family business does not itself have the legal form of a civil law company, often typical shareholder agreements as described above themselves might constitute each in their own right a civil law company pursuant to sections 705 ff. German Civil Code (BGB). Therefore, the law governing civil law companies plays a decisive role within the law of family businesses (Holler, 2020, § 75 paras. 316 et seq.). Unless otherwise stipulated, shareholder resolutions require a unanimous vote pursuant to section 709 German Civil Code.

**Special Rights (Section 35 German Civil Code).** Special rights (*Sonderrechte*) pursuant to section 35 German Civil Code as well as preference rights (*Vorzugsrechte*) are typical for family businesses and are frequently provided in favor of an individual family shareholder, a group of family shareholders or family branches (Holler, 2020, § 75 paras. 292 et seq.). These special rights, such as a multiple voting right or a presentation right for a member of the management or supervisory board, cannot be restricted or withdrawn without the

23For ample references, see Holler (2018, p. 559).

24In detail with regard to family connectedness constituting family businesses' DNA, Holler (2019b, p. 931); Holler (2020, § 75 para. 27).

*individual consent* of the shareholder or the group of shareholders concerned pursuant to section 35 German Civil Code. This statutory rule provides for a general principle valid for all kinds of legal forms, although there are of course particularities to be considered.25 Once such a special right has been granted, it can make a change of the partnership agreement, articles of association or shareholder agreement very difficult or even impossible in fact (Holler, 2020, § 75 para. 308). Furthermore, conflicts arise with regard to the continuity of special and preference rights in cases of succession (Holler, 2020, § 75 para. 309).

**The Core of the Membership (Kernbereich der Mitgliedschaft).** The core of the membership (*Kernbereich der Mitgliedschaft*) 26 constitutes another crucial limitation for the design of agreements or decisions in family businesses (Holler, 2018, p. 558; Holler, 2020, § 75 paras. 249 et seq.). There are certain fundamental shareholder rights that cannot be restricted or withdrawn without the individual consent of the shareholder concerned. It is a dilemma for family businesses that elementary regulation encompasses interference with the core of membership of the shareholders (*Eingriff in den Kernbereich der Mitgliedschaft*) and therefore requires the individual consent of each family shareholder concerned. For example, in order to avoid liquidity outflow, the right to terminate the partnership must be excluded (Holler, 2019b, p. 941f., 2020, § 75 paras. 312 et seq.) and compensation claims must be reduced.27 Both of these shareholder rights are part of the core of the membership at least in general and on the basis of the statutory structure of the company. There can be great uncertainty whether a particular shareholder right or position belongs to the core of membership or not in the individual case, depending on the individual design of the family company and its actual or effective shape (*Realstatut*) (Holler, 2020, § 75 paras. 252 et seq.).

#### *<IP_ADDRESS>. Obligation to Consent Due to Shareholder's Fiduciary Duty*

Since unanimous voting and individual consent often cannot be achieved, a frequent shareholder dispute relates to the question of whether the dissenting shareholder has an obligation to consent as a result of the fiduciary duty owed by a shareholder (Holler, 2020, § 75 paras. 371 et seq.; Holler & Mann, 2021: 407 et seq.). But here as well, the German Federal High Court places strict demands in evaluating the individual case.28 That is why blockades of essential corporate measures are often a challenge in family businesses.

25On the particularities of the law governing German Limited Liability Companies (GmbH), partnerships and German Stock Corporations (AG), Holler (2020, § 75 paras. 300 et seq.).

26About this in general and about the term, Roth (2021, § 119 para. 36 et seq.).

27In detail recently, Holler (2019b, p. 940f.) and Fleischer and Bong (2017, p. 1957); Hamburger Kreis Recht der Familienunternehmen (2020).

28Cf. the recent German Federal Court of Justice (BGH) decision of August 14, 2014 in case 23 U 4744/13, NZG 2015, 66 – Media-Saturn.

#### *<IP_ADDRESS>. Intergenerational Conflict*

Another typical reason for dispute in family businesses is intergenerational conflict. If the founder, for example, appoints one of his children as his successor and after a couple of years regrets this decision and removes the child from the position of director, a severe intergenerational conflict can be the consequence, affecting both the family and the business. Such generational conflict can be momentous not only because the child may have chosen a particular education, career or profession specifically because of having been designated as successor; wounds that children suffer often cannot be healed with financial compensation, and they burden family and shareholder relationships in the long run (Holler, 2021b, § 33 para.33).

#### *<IP_ADDRESS>. Juxtaposition of Corporate and Succession Law*

The juxtaposition of corporate law and succession law in a particular case is complex and a source of conflict. Quite often, we have to deal with interface problems, for example in the law of executorship (*Recht der Testamentsvollstreckung*),29 which is an indispensable instrument of succession and succession planning from a legal point of view.30 In general, under German succession law the executor of a will is exclusively entitled to exercise the shareholder rights of shares being part of the estate, and the heirs are insofar excluded – but details and exceptions are highly disputed.31 Whether there are exceptions to be made with regard to a particular situation – for example in cases of a conflict of interest or an interference with the core of the membership (Holler, 2020, § 75 para. 273a, 2021b, § 33 para. 187 et seq.) – can be hard to determine in the individual case; equally challenging is determining the consequences for the shareholder decision-making process.32 The interplay between corporate law and succession law in particular is complex.

#### **17.5. Family Constitutions**

How does a family constitution fit in the law of family businesses, especially with regard to the complex challenges routinely faced by practitioners in designing contracts as well as in resolving or managing conflicts between members of the family, family shareholders, and family branches?

#### *17.5.1. A Novelty in Corporate Law*

Family constitutions are relatively new to the law of family companies, although there might have been forerunner in the history of entrepreneur families.33

29Sec. 2197 et seq. German Civil Code (BGB).

30In detail, Holler (2021b).

31For an overview, see Zimmermann (2017, § 2205 paras. 14 et seq.); in detail with regard to family businesses, see Holler (2021b, § 33 para.185 et seq.).

32Cf. German Federal Court of Justice (BGH), decision of March 13, 2014 in case II ZR 250/12, NZG 2014, 945; Wicke (2015); Holler (2021b, § 33 para. 185 et seq.).

33For detailed historical and comparative legal classification of family constitutions, see Fleischer (2017); Holler (2020, § 75 para. 164 et seq.).

The practical importance and the proliferation of family constitutions in German family companies are increasing, along with the discussion of family constitutions in legal literature.34 This new instrument of family governance is not law driven but business driven, it has been designed by business advisors. Its analysis and classification are still at the very beginning in academic research and practice. (Fleischer, 2017; Holler, 2020, § 75 para. 167; Hueck, 2017; Uffmann, 2015).

#### *17.5.2. Family Governance Instrument*

One main reason for the rising emergence of family constitutions is probably that family companies have become increasingly aware that for the long-term success of the family company, not only good corporate governance but also good family governance is essential.35 Following the example of the German Corporate Governance Kodex, in 2004 a commission of leading professionals and family entrepreneurs was established and subsequently developed a Governance Code for Family Businesses (*Governance Kodex für Familienunternehmen* [GKFU]), which proposes guidelines for the responsible management of family companies.36 An essential part of the Code is the recommendation to create a family constitution (May & Koeberle-Schmid, 2011, p. 488f.).

#### *17.5.3. Name, Definition, Purpose, and Content of the Family Constitution*

Just as there is hardly a uniform name or definition of a family constitution, there is no uniform standard for the content and aim of family constitutions (Fleischer, 2019, p. 2823; Holler, 2018, p. 554, 2020, § 75 para. 168; Hueck, 2021, § 50 para. 1). A family constitution is supposed to define the goals and values of the family and the family shareholders in relation to the company. The aim of a family constitution is to secure the success of the company in the long run, to keep the company in the hands of the family, and to strengthen the coherence of the family (Fleischer, 2019, p. 2823; Holler, 2018, p. 555; Kalss, 2014, p. 350; Lange, 2009, p. 147).

Possible topics and the material content of a family constitution are as diverse as the different forms and designs of family constitutions which can be found in practice (Holler, 2018, p. 555; 2020, § 75 para. 173; Hueck, 2017, p. 9f.). Considering that essential aspects like corporate governance and the financing of the company are typically regulated by either the corporate statutes of the family business or by

34Holler (2018); Fleischer (2017); Fleischer (2016); Holler (2020, § 75 paras. 164 et seq.); Uffmann (2015); Reich and Bode (2018); Hueck (2017); Bong (2022); Kalss (2022); for Austrian law, Kalss and Probst (2013, chapter 3).

35Holler (2020, § 75 para. 165); cf. on the development of family governance, Kirchdörfer and Breyer (2014).

36INTES, FBN Deutschland, ASU Die Familienunternehmer: Governance Kodex für Familienunternehmen. "Kodex." www.kodex-fuer-familienunternehmen.de/kodex.

means of shareholder agreements or shareholder resolutions, as outlined above, the family constitution must not compete with these corporate documents, which would pose a risk for conflicts between the different provisions.37 Furthermore, the *process* of developing and formulating a family constitution is deemed to be as important as – and for some experts even more important than – the actual content of the family constitution with regard to its conflict-avoiding effect.38

#### *17.5.4. Parties, Language, and Versions of a Family Constitution*

It is recommended that a family constitution be commonly developed by all family members, not only family shareholders, in understandable language and that it be signed by all family members, so that all family members, including those who might not be legally or economically educated, accept and understand the instrument.39 Furthermore, different versions are recommended – one for the family (family version) and another one for the management company (company version).40

#### *17.5.5. Legal Quality and Relevance of Family Constitutions*

The legal basis for family constitutions is still not clear and for the most past has never been discussed, especially with respect to the legal effect of family constitutions.41 Therefore, the family constitution has properly been qualified as a mystery (*Rätsel*).42 It is a common opinion that a family constitution is merely a memorandum of understanding, being only morally binding and legally nonexistent and thus unenforceable.43 These views are, however, in their generality at least questionable and need to be examined carefully on the basis of the relevant legal and especially corporate law standards.44 With regard to the purpose and qualification of the document as a "constitution", it is rather questionable that the family constitution is only a morally binding document without any legal effects. The term "constitution" already implies a certain commitment with legal effect.45

37Holler (2018, p. 557); Holler (2020, § 75 para. 173); critical as well Lange (2013, pp. 33, 40); Kirchdörfer and Lorz (2011, p. 105); Graf and Bisle (2010, p. 2409ff.).

38For a detailed description of this process and the procedural regulatory tasks for conflict avoidance and resolution, see Holler (2018, p. 555f.); Holler (2020, § 75 para. 174 et seq.); Hueck (2021, § 50 para. 5); Kalss (2022: 37ff.).

39May and Koeberle-Schmid (2011: 489f.); Baus (2016: 108); Lange (2009: 148); Kirchdörfer and Lorz (2011: 101); Holler (2020: § 75 para. 193); Oertzen and Reich (2017: 1123).

40Baus (2016: 110); Holler (2018: 561).

41Holler (2020: § 75 para. 167); Hueck (2017: 335).

42Fleischer (2016).

43Kirchdörfer and Lorz (2011: 101); Koeberle-Schmid, Schween and May (2011: 2500).

44Holler (2018: 557, 560ff.); Holler (2020: § 75 paras. 196 et seq.).

45Holler (2020: § 75 para. 195).

# **17.6. Classification of Family Constitutions in the Law of Family Businesses**

#### *17.6.1. General Approach to Legal Effects and Legal Characterization*

Let us have a closer look at the moment of adoption of a family constitution and its effect: What actually happens, and what exactly is the family doing (Fig. 17.2)?

Fig. 17.2. The Link Between the Founder's and the Family's Will, resp., and the Family Business Statutes.

The owner family draws up the values and goals for the family and the family business (Holler, 2018, p. 559). In fact, the family is setting up a new tradition

and thereby a new design of the characteristics of the family business. How does this relate to the founder's will, the founder's tradition, and the founder's design of the family business?

The family touches upon the founder's will, which is – as outlined above46 – relevant and decisive for the determination of content and the interpretation of the family business statutes (Holler, 2018, pp. 559, 562). Ultimately, the family either amends, modifies, or even replaces the founder's will and tradition, which – until this moment – had been the DNA of the family business and had determined the content and interpretation of the family business statutes; it is to some extent an *emancipation process* of the family and the following generation(s) in relation to the founder generation (Holler, 2018, pp. 559, 562). This event illustrates that the family constitution, with its adoption, is not without legal effect in relation to the law of family business (Holler, 2018, p. 562). Therefore, it cannot be generally stated that a family constitution is legally non-binding.47 As pointed out, this assumption represents a contradiction in relation to family business law principles.

As an interim result, it can be stated that family constitutions may have legal effects on determining the content and interpretation of the corporate statutes of

46See above under point <IP_ADDRESS>.

47However in this sense, Hueck (2021, § 50 paras. 22ff.).

the family business, which – of course – in each individual case must be examined carefully. These principles apply at least to partnerships. The question of whether they are valid also for corporations cannot be answered at this point – for corporations these principles are at least valid for typical shareholder agreements such as pooling agreements or protective association agreements (*Schutzgemeinschaftsverträge*) (Holler, 2018, p. 561). If the family business is a closed shop and therefore a pure family business with the shares having been transferred only to family members since its foundation, they should also be applicable to private limited companies.48

#### *17.6.2. The Family Constitution Can Constitute Another Corporate Level*

#### *<IP_ADDRESS>. Partnership Under Civil Law*

Furthermore, a family constitution can constitute – depending on the particular design and formulation in the individual case – a partnership under civil law among the family members.49 As a consequence, sections 705 ff. German Civil Code are applicable for the internal relationship of the family members that are part of the family constitution.

I have outlined the typical internal corporate structure of family businesses, often divided by shareholder groups and family branches each having their own statutes and shareholder agreements. Similar and corresponding to this, different levels of civil law companies within the owner family are possible, since – in general – there will be two groups within the family: the shareholding family members and the non-shareholding family members (e.g., marriage partners or future shareholders) who directly support the coherence of the family and who indirectly support the family business.

The purpose of a family constitution will regularly be supporting the family business company purpose (*Gesellschaftszweck*) 50 required for the existence of a civil law company. Such purpose includes the common will of all members of the family to secure the success of the family business in the long run, keeping the company in the hands of the family and strengthening the coherence of the family (Holler, 2018, p. 561).

In practice, a large number of families will have followed and implemented the rules recommended by the Governance Code for Family Companies (*Governance Kodex für Familienunternehmen* (GKFU)). This includes the recommendation to agree on a fixed term for the validity of the family constitution and to allow

48On the subjective and objective interpretation of articles of association, Holler (2020, § 75 paras. 225 et seq.); Prütting and Schirrmacher (2017, 839 et seq.).

49Holler (2016, § 75 para. 111); Holler (2018, p. 561); Holler (2020, § 75 para. 198); In this sense, Fleischer (2016, p. 1515); Prütting and Schirrmacher (2017, p. 837); Reich and Bode (2018, p. 307); Kindler (2019, § 105 para. 2); for Austrian Law Kalss (2022, 46). critical of this classification Hamburger Kreis Recht der Familienunternehmen (2018, M26).

50On the special company purpose of family businesses and its momentous legal consequences, Holler (2019b, p. 936ff.).

amendment of the family constitution by a qualified majority decision of the family.51 The recommendation of the Code is, therefore, based on the idea of a company relationship between the family members, which meets all the requirements for a partnership under civil law.52

As a consequence, the family constitution must comply with the law of civil law partnership, meaning regulation and design requirements with regard to issues such as the right of termination (sec. 723 para. 1) or the death of a family member (sec. 727 para. 1), since a civil law partnership – if not otherwise agreed – ends automatically with the death of one of its members.53

### *<IP_ADDRESS>. Shareholder Resolutions*

Finally, a family constitution can include a valid shareholder resolution possessing potential regulatory content in relation to the family business (Holler, 2018, p. 561). Pursuant to general corporate principles, this is conceivable if within the family constitution all family shareholders agree upon a particular earnings retention rate in order to strengthen the internal financing of the company; also required is that such agreement is disclosed to the management of the family business, for example, where a "company version" of the family constitution is provided to management.

### *<IP_ADDRESS>. Impact on a Shareholder's Fiduciary Duties*

Last but not least, a family constitution can have an impact on shareholders' fiduciary duties (Fleischer, 2016, p. 1518f.; Hamburger Kreis Recht der Familienunternehmen, 2018: M 27; Holler, 2018, p. 561; Holler, 2020, § 75 paras. 206 et seq., 232 et seq. and 241; Holler & Mann, 2021, p. 409; Reich & Bode, 2018, p. 307), especially if it provides include terms regarding shareholder issues of the family business, for example, the requirement that a family member be a member of the board of directors. In such a case there might even arise an approval obligation depending on the design and substance of the family constitution.

# **17.7. Conclusions**

51Cf. Sec. 8.3 Governance Kodex für Familienunternehmen (GKFU); Kirchdörfer and Lorz (2011, p. 101); Hueck (2017, p. 123f.).

52Holler (2018, p. 562); Holler (2020, § 75 paras. 205 and 202 et seq.); approving Fleischer (2016, p. 1515); Prütting and Schirrmacher (2017, p. 837).

53Holler (2018, p. 562); Holler (2020, § 75 para. 217); in this sense, Reich and Bode (2018, p. 308f.).

in the family constitution – touches upon such "corporate DNA" of the family business if it provides for a material regulation of values and goals (tradition).54

54On the corporate DNA of family businesses characterized by their special company purpose, Holler (2019b, p. 937ff.).

55See for terminus Holler (2018, p. 563); in detail with regard to legal design and typical family governance elements in corporate statutes of family businesses Holler (2020, § 75 para. 185 et seq.); Fleischer (2019).

#### **References**

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# Chapter 18

# **Discussion Report Part 4: Legal Research III**

*Holger Fleischer*

*Max Planck Institute for Comparative and International Private Law, Hamburg, Germany*

Lorenz Holler: Family Constitutions and the Complexity of Family Businesses from a Counsel's Point of View

The discussion first revolved around the relationship between the family constitution and the founder's intention. A practitioner said that in family businesses, the founder's intentions and values typically shape family traditions as well as the company charter. In later generations, his intentions may be replaced by the family's intentions and values, which in turn shape tradition and the company charter. The family constitution serves as a vehicle to shape the family's intentions. A law professor added that this role of the family constitution fits nicely with the historical development of family constitutions as modern forms of house laws, in which the patriarch's dominance is replaced by a family consensus. According to another legal scholar, German courts acknowledge that the founder's intentions may play a role in the interpretation of partnership agreements and even corporate statutes if they find an expression in the document. Since the founder's intentions can fade over time and the family constitution is constantly revised, this may speak in favor of considering the family constitution as an aid for interpretation. Holler admonished that, in practice, it is very dangerous to touch the founder's intentions and replace them with a family constitution without making sure that all agreements within the family business are properly coordinated. A managerial scholar explained that, from a governance perspective, the firstgeneration business is entirely different from the following generations. After the

**doi:10.1108/978-1-83797-200-520231018**

**Family Firms and Family Constitution, 249–250**

**Copyright © 2024 by Holger Fleischer. Published under exclusive licence by Emerald**

**Publishing Limited. This work is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this book (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode**

first generation, the governance framework needs to be revised and adapted for the future. Founders cannot anticipate all future contingencies and they cannot imagine a business 10 times the size of their initial business. To emancipate the company from its founder is of enormous importance. If the next generations run the company like the founder, it will collapse within two generations. Nature invented succession as an incentive to adapt. It is hard to eliminate structures that the founder implemented.

A second strand of discussion dealt with the pros and cons of a branch structure (family lines, "Stammesprinzip") in family firms. A managerial scholar said that not one researcher would recommend a branch structure. From a governance perspective, a branch structure has only disadvantages. Inherent in a branch structure is the logic "branch first" instead of "business first." In a branch structure, discussion is taking place only within the branches. On company level, only positions of the branches will be exchanged, rather than arguments. A branch structure therefore creates conflicts. And it is very difficult to abolish a branch structure because every branch has to waive its special rights. Usually, unanimity is necessary. In 30 years, the managerial scholar predicted, it will no longer be lege artis to draft contracts which follow a branch logic. Without a branch logic, there will be shifting alliances between the shareholders; everybody will be the winner sometimes. This is necessary for decision-making bodies to function. Holler added that a branch structure can lead to conflict of interest. It may also encourage vote-buying and tit-for-tat. A management consultant cautioned, however, that one must examine whether a branch structure is a question of design or a given fact. A branch structure typically evolves naturally from the first in the second generation, especially if there is a reluctance to involve legal advisors. A law professor added that a branch structure might be advantageous because it helps to overcome collective action problems and it facilitates decision-making. As an alternative, a management consultant suggested to appoint multiple representatives based on various interests instead of family relationships, such as a representative of the next generation.

Finally, there was an exchange of ideas about the role of legal advisors in family firms. A law professor stated that they serve an important precautionary function in family firms. They gain experience with sensitive topics such as powers of attorney in the case of legal incapacity. Following up on that, Holler explained that every shareholder should designate a representative beforehand to ensure that the company remains able to act and make decisions. The obligation to have such a power of attorney may be enforced indirectly in the articles of association by stipulating that the right to vote rests until the shareholder has complied with this obligation.

Part 5

# **Conclusion**

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# Chapter 19

# **Directions for Future Research**

*Holger Fleischera and Stefan Priggeb*

*a Max Planck Institute for Comparative and International Private Law, Hamburg, Germany b HSBA Hamburg School of Business Administration and Institute for Mittelstand and Family Firms, Hamburg, Germany*

### **Abstract**

This chapter focuses on the ideas and proposals of the "conference," i.e., suggestions for future research put forward by the conference participants as a group, working for two days on this subject. These research proposals include inter alia: the potential difference between the family constitution in its written form and the constitution in its practiced form; heterogeneity versus standardization of family constitution content (because of some dominating consulting approaches); the effect of national legal frameworks and traditions on the prevalence of the family constitution and its content in different countries; opportunities in large sample quantitative studies.

*Keywords*: Family constitution; development stage of the family constitution; application stage of the family constitution; gap between practice and written family constitution; revising the family constitution; heterogeneity versus standardization of family constitutions; national legal framework's effect on the family constitution; intra-family conflicts as club/public goods problem

**Family Firms and Family Constitution, 253–256**

**Copyright © 2024 by Holger Fleischer and Stefan Prigge. Published under exclusive licence by Emerald Publishing Limited. This work is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this book (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode doi:10.1108/978-1-83797-200-520231019**

The Hamburg Conference: Law and Management of Family Firms is a *research* conference. So, what are the main findings of the conference in terms of recommendations for future research? In this short chapter, we would like to highlight the *specific* contributions of this *conference*. "Specific" meaning that we do not want to develop the broad, encompassing picture of research opportunities in the field of family constitutions in general. Those ideas developed in extant literature are covered to a large extent in the surveying chapters by Fleischer, and Prigge and Mengers. Instead, this chapter focuses on the ideas and proposals of the "conference," i.e., suggestions put forward by the conference participants as a group, working for two days on this subject. Thus, our role in this chapter is only that of clerks, documenting what originated from the joint work of the participants.

There was great consensus that the family constitution as an object of analysis has to be understood as a phenomenon consisting of two stages: the development stage and the application stage. Moreover, during the second stage, actual practice might diverge from the written form, thus, a further distinction between written form (document) and practice might be necessary. To be sure, these are by far not brand-new findings, however, they have major implications for any analysis of the effects or the determinants of a family constitution. (From here on, the term "family constitution" is used to designate the complete phenomenon, including all stages; if only a certain stage or aspect of the family constitution is discussed, it will be explicitly indicated.) Some of these implications matter for the research topics discussed in what follows.

There was also great unity, that the development stage is of huge importance; it was even speculated that it might be as important or even more important than the application stage. That points to a highly relevant research field: What is the relative significance of development and application stage? Is it possible to separate the effects of the development stage on family and business from those of the application period? Another item in this research field is whether, and if so, how, the process for the initial family constitution differs from that for the revised family constitution.

Discussions often returned to the question of what extent the written rules of the family constitution are practiced. This issue implies that the document does not necessarily reflect the reality in the owner family. This is another area offering interesting research opportunities: To begin with an inventory topic, more information would be welcomed on whether this gap actually exists. Furthermore, it is of great interest how families deal with behavior diverging from the written rules. To name just two possibilities: Do they accept or even welcome it as flexible handling of rules in a complex and changing environment, or do they acquiesce grumblingly the rule violation by some family members simply because of a lack of enforcement options? In addition to that, if we know more about the gap between practice and written rules, it is easier to evaluate the informative value of document analyses of family constitutions.

Heterogeneity versus standardization was another major topic in our discussions. Heterogeneity among owner families and among family businesses is a major issue in current family firm management research. The conference added a new ingredient to this discussion stream as it explored the hypothesis that there is a trend toward the standardization of family constitutions. (This part of our discussions based mainly on experiences from Germany.) The argument rests on the observation that there are only a few major players in the market for family constitution advisory services. Concentration is even stronger as former employees of these significant players more or less follow their old employer's approach when they offer family constitution services on their own. In the development stage and in the written document, the assumed standardized approach of the consultants meets family heterogeneity. Ex ante it is an open question whether and to what extent this assumed homogenizing effect indeed leads to more homogeneous development processes and documents. For the practiced family constitution in the application period, there are only the (heterogenous) families acting, the potentially homogenizing effect of the consultants works only indirectly via their influence on the development process and document. Thus, it could be questioned whether the assumed standardization really goes beyond the structures of development process and document, resp., if it exists at all. In any case, this is another research field that could contribute valuable knowledge about family constitutions.

The degree of family constitutions' (understood in the very broad meaning) homogeneity is also seriously linked to large sample empirical studies. Graves et al. with the very first or one of the first large sample studies with a *separate* variable for the existence of a family constitution represent a significant advancement compared to previous large sample studies with a 0/1 *composite* family governance indicator variable. But the interpretation of studies like the one provided by Graves et al. depends very much on homogeneity. Generally speaking, a 0/1 indicator variable requires the assumption that the state which is coded "1" is homogeneous. However, if the variable "1" represents significantly heterogeneous development processes, document content, and constitution practices, the variable would only be statistically significant in a regression analysis if the family constitution (in the broadest meaning) exerts, despite all heterogeneity, a unified force on dependent variables like family or business performance. Insignificant results of a 0/1 family constitution variable need not necessarily indicate the absence of a link to the dependent variable, they could also be a consequence of the diverse settings represented by "1." Besides analyzing whether the assumed heterogeneity exists at all, small sample studies (single or multiple case studies) could try to develop more finely granulated variables to measure family constitutions, i.e., variables that go beyond 0/1 and reflect features like quality or issues dealt with in family constitutions (in the broadest meaning).

The few large sample studies provided so far ignore the time dimension. The 0/1 family constitution variable does not reflect how many years ago the development process was concluded. This lack of consideration of the time dimension is particularly relevant if the development process is assumed to be so eminently important. From a technical perspective, the integration of this variable in the analysis of the large sample studies should be possible without problems. But most probably, that information was not collected. The results for such a time variable could contribute to estimate the relative importance of development stage compared to application stage.

Analyzing family governance and, in this case, family constitutions require a theoretical foundation. So far, research of family firm management has been a net importer of theories and concepts from other economic fields that were then adapted for application in family firm management. An innovative idea was developed in the discussions. It bases on the observation that intra-family conflicts often root in conflicts between the interests of the individual family member and the interest of the family (and the family firm) at large. This structure resembles the basic problem occurring with club/public goods. For these goods, it might be that individual and collective rationality conflict with each other, leading to suboptimal outcomes for everybody. This field of research has been developed over decades, yielding a rich set of analytical approaches and mechanisms to mitigate such negative effects. It might be worthwhile to study whether this similarity could be exploited to transfer some of the concepts developed for these goods to the family firm context.

Another aspect from the discussion that points at a worthwhile research field is linked to the international dimension. Part of the conference discussions focused on the reasoning that different cultures have different ideas of the family and family cohesion which in turn could be expected to have an effect on the family constitution. This cultural component of the international dimension might not be new to the literature, so it does not need further consideration here, but a second nuance of the international dimension was also developed in the discussion. Its interdisciplinary character fits very nicely to the very basic idea of this conference series. It was debated that the respective national legal framework might have an effect on how the family constitution document might be set up. What is already regulated in national laws or typically settled in other legal documents? What is the probability that some kind of legally binding power is or will be attached to the family constitution? If such effects of the legal framework on the family constitution exist, it would not be a surprise if this in turn then affects the development process and the family constitution practice.

From a legal point of view, participants conjectured that the legal effects of family constitutions might become stronger in the future – a prediction that deserves further attention. In addition to that, it will also be interesting to observe whether certain types of family constitutions will travel around the world as private legal transplants, comparable to certain types of M&A contracts. Furthermore, one could explore more closely how different legal systems integrate the various legal sources of family governance into a coherent framework. As far as the emerging corporate governance industry for family businesses is concerned, it may be promising to examine the influence and market share of competing actors such as lawyers, accountants, and management consultants in shaping family constitutions, both nationally and internationally.

# **Index**

Accomenda, family firms as promoters of, 5–7 Ad-hoc Agreements, collection of, 184–185 Afep-Medef Code, 221 *Affectio familiae*, 182–184, 221 Agency theory, 106, 161 agency theory-based reasoning, 46 Agricultural enterprises, special rules for, 204–205 *Aktiengesellschaft* (Public Limited Company), 217 Alignment, 105–106, 110 Anglo-American legal system, 167 "Anglo-American model" of governance, 144 Applicable law, Succession law arrangements already possible under, 207 Application stage of family constitutions, 254 Australia, 144 Australian and New Zealand Industrial Classification (ANZIC), 149 Australian Corporations Act, 144 Australian family business context descriptive statistics, 151 governance, 145–146 effect of governance mechanisms on family-oriented performance, 151–153 effect of governance mechanisms on financial performance, 153 implications for future research, 161–162 implications for practice, 161

limitations, 160–161 research method, 147–150 research questions, 147 results, 151 wealth, and performance of family businesses, 146–147 Australian family-owned businesses, 147 Austrian Civil Code, 201 Austrian law, 200–201, 226 Baring, 7–9 Baring banking house, 8 Basic Law of Fugger Trade, 7 Behavior rules, 41 Behavioral agency, 161 Belgian Corporate Governance Code, 16 Belgium, 16–17 Bertelsmann, 9–10 Bivalent attributes, 82 Board diversity, 58 Bonduelle Group, The, 219–220 Brussels Court of Appeal, 22 Business, 118 administration, 166 business-focused approach, 187–188 effects of family constitution in business practice, 167–168 fair process between family members and in, 87–89 management perspective, 51 systems, 65, 102 Business governance family constitution's position in, 34–35

mechanisms, 144, 147, 149, 151, 153 Charte Familiale, 16–17 Civil law company, 231 partnership under, 241–242 *Code Buysse*, 16 Codes of governance for family firms, 19 Codex, The, 36 Cohesion, 105, 109–111 factors, 123–125 Communication, 95, 106–109 Communities of heirs, 201–202 *Compagnia*, 5 Company law, 17, 201, 210 arrangements, 207 interfaces between succession and, 198 law on corporations, 210–211 partnerships, 207–210 respective tasks of, 199 Company-induced critical incidents, examples for, 127 Complexity in law and fact, 234 emotions, 234 juxtaposition of family and family business, 234 Conceptual origins of family constitutions, 181 convergence in concept of family business governance, 184 corporate governance, 183–184 House Laws and *fideicommissum*, 181–182 strategic planning, 182–183 Conference, 254 Conflicts and dangerous for family businesses, 234–237 in family businesses, 228 intergenerational conflict, 237 juxtaposition of corporate and succession law, 237

obligation to consent due to shareholder's fiduciary duty, 236 reasons for, 235 unanimous votes and individual consent requirements, 235–236 Consensus-creating devices, 189 *Consortium ercto non cito*, 5 Constitution, 239 Constrictive familiness, 83 Consultancy literature, 42–43 Consulting approach, 186 Continuation clause, 208 Contract replication of rules by, 205–207 violations, 73 Convergence in concept of family business governance, 184 Convergent validity, 150 Corporate DNA, 243 Corporate governance, 34, 65, 145, 183–184 codes, 221 in family businesses, 170 mechanisms of corporate governance in family businesses, 166–167 practices of Australian family businesses, 144 Corporate law juxtaposition of, 237 novelty in, 237–238 Corporate levels and statutes, architecture of family business providing for, 230 Corporate property as special property, 203–204 Corporate succession, 199, 204–205 Corporations, law on, 210–211 Creation process, 14, 49 Critical incidents broad segments of, 118–119 in context of entry into and exit from system, 122–123

decisive role of legal advisor in identifying, 130–131 Decision-making process, 75, 185 Decoupling, 47 Deliberation process, 93 Development process, 255 Development stage of family constitutions, 254–255 Distinctive familiness, 83 Distribution, 200 Distributive effect of succession law, 200 Distributive equality principle, 201 Distributive justice principles, 87 Diversification, 129 Diversity of family firms, 218 Bonduelle, 219–220 Hermès, 220 Lactalis, 218–219 Roquette Frères, 219 Downfall protection design, 128 fail-safe back-up system, 129–130 monitoring system, 128–129 performance system, 128 Drafting process, 21 Dutch family SMEs, family constitution practices in, 86–87

Early precursors of family constitution, 10 Egalitarianism from family system, 71 Emancipation process, 240 Emergent themes, 113 Emotional behavior, 235 Emotional ownership, 161 Emotional value, 161 Emotions, 234 Empirical big-sample study, 46 Enterprises, 204 *Entreprise unipersonnelle à responsabilité limitée* (EURL), 217

Entry clause, 209 Equality, 74, 200 Equity theory, 65, 69 European Academy of Management (EURAM), 31 European Commission, 198 European Group of Family Businesses (GEEF), 198 European Institute for Advanced Studies in Management (EIASM), 31 F-PEC Scale, 33–34 Factor analysis, 48 Fail-safe back-up system, 129–130 Failure Mode and Event Analysis (FMEA), 118, 120, 138 Fair process, 88, 98 between family members and in business, 87–89 Fairness perceptions, 70 *Familienverfassung*, 17 Family, 118 boot, 90 company, 231 council, 145 feelings, 235 juxtaposition of, 234 ownership contract, 188–189 protocols, 67, 112–113 shareholders, 230 statement, 185–186 as strategic resource, 82–83 system, 66 thinking, 235 wealth, 146 Family agreement (*see* Family constitutions) Family Business Australia (FBA), 144 Family business governance, 66 convergence in concept of, 184 model, 43 research, 145 Family Business Protocol, 167

Family business(es), 4, 10, 23, 64, 118, 168, 197–198, 228 characteristics and management of, 169 complexity in law and fact, 234 conflicts typical and dangerous for family businesses, 234 corporate governance and family governance in, 170 juxtaposition of, 234 law of family businesses, 228–233 managing complexity and managing conflicts, 228 mechanisms of corporate governance in, 166–167 research on family governance, 113 special and individual characteristics, 235 typical reasons for conflicts, 235–237 wealth, and performance of, 146–147 Family businesses law, 228 architecture of family business providing for different corporate levels and statutes, 230 classification of family constitutions in, 240–242 founder's will and tradition, 229 great diversity of legal forms of companies, 230 law of individual contracts and regulations, 228 legal significance for interpretation and content of family business statutes, 229–230 levels of regulations, 233 not only articles of association, but different corporate levels, 230 shareholder agreements, 230–232 shareholder resolutions, 232 tradition of family business, values, and goals, 229

typical characteristics and regulation requirements, 228–229 Family constitutions, 19, 50–51, 86, 93–94, 105–107, 145, 188, 195, 221–223, 249, 254, 256 through ages, 10 articles of association, 18 Belgium, 16–17 business-focused approach, 187–188 characteristics and management of family businesses, 169 characterization of survey and sample, 168–169 classification en bloc, 189 classification of family constitutions in law of family businesses, 240 codes of governance for family firms, 19 collection of Ad-hoc Agreements, 184–185 conceptual origins, 181–184 corporate governance and family governance in family businesses, 170 early precursors, 10 effects of family constitution in business practice, 167–168 as element of family governance, 170–171 exposing family constitution chameleon, 180 family constitution constitute another corporate level, 241 family firms and legal forms, 4–10 family governance instrument, 238 family-focused approach, 185–186 France, 15 general approach to legal effects and legal characterization, 240–241 Germany, 17

within governance framework for family firms, 18 guidelines of moneyed aristocracy, 12–13 House Laws of High Nobility, 10–12 impact on shareholder's fiduciary duties, 242 institutions, 41 Italy, 17 juridification of, 20–21 key findings, 23–24 legal facts, 189–190 legal implications, 189 legal quality and relevance of, 239 in light of German Company Law, 20 mechanisms of corporate governance in family businesses, 166–167 modern variations, 14 name, definition, purpose, and content of, 238–239 novelty in Corporate Law, 237–238 obligation to implement, 190 own empirical findings, 168 ownership-focused approach, 188–189 parties, language, and versions of, 239 partnership under civil law, 241–242 position in family and business governance, 34–35 practical approaches, 184 practices in Dutch family SMEs, 86–87 recommendations for action, 171–172 rise of family constitutions and legal research, 3–4 roles, 41 rules for governance of family firms, 220–223

shareholder agreements, 19, 190 shareholder resolutions, 242 Spain, 16 standardization of, 22 statutes, 18 theorization of, 21–22 typical content of, 35 United States, 14–15 values and goals, 41 Family firms, 4, 30, 71 in 19th century between partnerships and corporations, 7–9 codes of governance for, 19 designing and implementing governance mechanisms in, 73–75 diversity of, 218–220 family constitutions within governance framework for, 18 as first users of Roman Societas, 5 individual's cognitive model for assessment justice in, 71–73 main types of legal structures for, 216 in particular family constitutions, rules for governance of, 220–223 and plurality of legal forms in 20th and 21st centuries, 9–10 primer on family firm management as field of research, 30 as promoters of the medieval Compagnia, Accomenda and OHG, 5–7 receiver perspective to governance in, 67–70 researchers, 31 SA, 217 SARL, 217 SAS, 217 SCS and SCA, 218 SNC, 217–218

Family governance, 38, 57, 85–87, 103 (*see also* Corporate governance) a code of conduct, 111–112 a set of rules, 112–113 alignment, 105–106 bivalent characteristics, 83–84 central themes, 104 changeability of decisions, process, goals, and principles, 96–97 clarification, 94–95 cohesion, 109–111 commitment to fairness, 97 communication, 106–109 communication and voice, 95 company, 89–90 consistency across people, over time and with agreed values and norms, 96 data collection, 89 elements of, 58 fair process between family members and in business, 87–89 family as strategic resource, 82–83 family boot, 90 in family businesses, 170 family constitution, 93–94 family constitution as element of, 170–171 family constitution's position in, 34–35 findings, 94 instruments, 49, 238 management of strategic resources, 84 mechanisms, 144, 147, 149, 153 ownership structure, 90–93 in practice, 89 process, 222 systems, 102 theoretical perspectives, 82 Family Influence Familiness Scale (FIFS), 34

Family members, 138 fair process between family members and in business, 87–89 Family-focused approach, 185–186 Family-oriented performance, 48, 148, 150 effect of governance mechanisms on, 151–153 Family-owned companies, 166, 169 Ferdinandean House Rules (1554), 11 *Fideicommissum*, 181–182, 189, 207 Financial performance, 48, 148, 150 effect of governance mechanisms on, 153 Förderkreis Gründungs-Forschung (FGF), 31 Four types of family constitutions, 184 Framing, 108 France, 15 diversity of family firms, 218–220 main types of legal structures for family firms, 216–218 rules for governance of family firms, in particular family constitutions, 220–223 Fredo effect, 85 French Civil Code, 222 French courts, 223 French family firms, 218 French limited liability companies, 220–221 Fugger, Jakob, 5–7 Future research, paths of, 49–51 G20, 34 Gap between practice and written rules, 254 German Civil Code, 201, 231, 235, 241 German Company Law, 9

family constitutions in light of, 20–22

German Corporate Governance Codex, 36 German corporate law, 229 German Federal Court of Justice, 234 German Federal High Court, 236 German Limited Liability Company Act, 18 German succession law, 237 Germany, 17, 166–168 *Gesellschaft mit beschränkter Haftung* (GmbH), 217 *Gesellschaft mit beschränkter Haftung* Act (1892), 7 Governance, 118, 145–146, 183 corporate governance codes, 221 family constitutions, 221–223 legislation, 220–221 policy implementation, 75 process, 127 protocols, 187–188 receiver perspective to governance in family firms, 67–70 rules for governance of family firms, in particular family constitutions, 220 shareholder agreements, 221 Governance Code for Family Businesses (GKFU), 17, 19 Governance Codex, 36 Governance Codex for Family Firms, The, 36 *Governance Kodex für Familienunternehmen* (GKFU), 238, 241 Governance mechanisms, 76 designing and implementing governance mechanisms in family firms, 73–75 effect of governance mechanisms on family-oriented performance, 151–153 effect of governance mechanisms on financial performance, 153

Governance system basic dilemma for achieving "ultra-stability", 130 broad segments of critical incidents, 118–119 decisive role of legal advisor in identifying critical incidents, 130–131 downfall protection design, 128–130 examples for company-induced critical incidents, 127 examples of owner-induced critical incidents, 122–127 extant research, 119–121 importance of factors, 121–122 Heirs, communities of, 201–202 Hermès, 220 Hermès International, 220 Hermès Paris, 220 Heterogeneity, 254 standardization of family constitutions *vs*., 254 Heterogeneous development processes, 255 Homogeneous development process, 255 House Agreements (1703), 11 House Laws, 181–182 House Laws of High Nobility, 10–12 House laws of late Middle Ages, 23 Hoyer, 30 HOYER GmbH Internationale Fachspedition, 39 Imperial Austrian Family Statute (1839), 11 Inadvertent violation, 73

Individual consent requirements, 235–236 Individual's cognitive model for assessment justice in family firms, 71–73 Inheritance and Family Law, 233

Institutions, 41 Insurance policy, 85 Interactional justice, 70 Intergenerational conflict, 237 Internationalization processes, 167 INTES Institute, 168 Intra-family conflicts, 256 Italy, 17

Juridification of family constitution, 20–21 Justice perceptions designing and implementing governance mechanisms in family firms, 73–75 family business governance, 65–67 ideas for future research, 75–78 individual's cognitive model for assessment justice in family firms, 71–73 receiver perspective to governance in family firms, 67–70

Kernbereich der Mitgliedschaft, 236 KGaA, 23 Kormann's differentiation, 138 KPMG Australia, 144

Lactalis (family businesses in France), 218–219 Legal advisors, 188 decisive role of legal advisor in identifying critical incidents, 130–131 Legal characterization, general approach to, 240–241 Legal classification of family constitutions, 189 Legal consultant, 59, 136 Legal effects, general approach to, 240–241 Legal forms, 4–10 family firms and plurality of legal forms in 20th and 21st centuries, 9–10

great diversity of legal forms of companies, 230 Legal practitioner, 138 Legal qualification, 231 Legal quality and relevance of family constitutions, 239 Legislation, 220–221 Legitimacy, 45 Les Fils de Peugeot Frères, 13 Liberal approach, 196 Longitudinal data collection method, 161

Managing dispersed ownership within owner family family governance, 103–113 Max Planck Institute for Comparative and International Private Law, 180 Mediation, 172 Medici, Banco, 5–7 Medici, The, 6 Medieval Compagnia, family firms as promoters of, 5–7 Membership, core of, 236 Merck, 9–10 Meritocracy, 74 from business systems, 71 logic, 72 MiddleNext Code, 221 Moneyed aristocracy, guidelines of, 12–13 Moral obligation, 21 Motives for introduction of family constitution, 170 Mulliez family's constitution, 226 National legal framework, 256 National legal system, 201

Netherlands, 89, 92 NNZ (multinational company), 89–94 Non-family CEO, 137 Non-family firms, 31 Non-family member, 136

Nonfinancial performance, 48 Noord Nederlandse Zakkenhandel (NNZ), 90

OECD, 34 OHG, family firms as promoters of, 5–7 Ohio law, 9 "One size fits all" document, 59 Optimal leadership, 41 Organizational justice, 65, 70 Owner-family, 35, 114 Owner-induced critical incidents analysis of cohesion and separation factors and separation hurdles, 123 cohesion factors, 123–125 critical incidents in context of entry into and exit from system, 122–123 examples of, 122 separation factors, 125 separation hurdles, 125–127 Ownership, 118 controlling rights and property rights, 202–203 system, 66 Pacte familial, 15 Paradoxes, 39 Paris Court of Appeal, 15 *Patto di famiglia*, 17 Pearson matrix, 150 Pierre et Benoît Bonduelle SAS, 220 Planning process, 188–189 for family bonding, 185 for family statement, 186 Preparation process, 171 Principal Component Analysis (PCA), 148 Procedural justice, 70, 87 Property rights, ownership involves controlling, 202–203 Protocolo familiar, 16 Psychological contracts, 45, 65, 68

Qualified successor clause, 209 Quantitative analysis, 162, 175–176 Quantitative-empirical survey, 168 Receiver approach, 76 Receiver perspective to governance in family firms, 67–70 Recipient approach, 65 Regression analysis, 48 Relational governance, 85 Research conference, 254 Research method, 145, 147 control variables, 149–150 dependent variables, 147–149 governance variables, 149 measurement of variables, 147 validity, 150 Resource mobilization theory, 109 Resource-Based Theory (RBT), 82 Resource-Based View (RBV), 32, 82 Resources, 82, 109 Rights, ownership involves controlling, 202–203 Rights of control, 202 Rockefeller, John D., 7–9 Roman Societas, family firms as first

users of, 5 Root causes of disappearance, 122 Roquette Frères (family-owned company), 219

Schlumberger business dynasty, 13

*Sebastian Bong* (French corporate law), 182 Separation factors, 125 Separation hurdles, 125–127 Settlement exclusion clause, 208

agreements, 19, 190, 202, 221, 230–232

duties, 242

impact on shareholder's fiduciary

Scientific literature, 43–49

Shareholders, 203, 235

obligation to consent due to shareholder's fiduciary duty, 236 resolutions, 232, 242 Simplified stock companies, 221 Small-and-medium enterprises (SMEs), 31 Social group cohesion, 110 Social movement theory, 109 Social systems theory, 46 *Société à responsabilité limitée* (SARL), 217–218 *Société anonyme* (SA), 217–219 *Société d'Emboutissage de Bourgogne* (SEB), 215 *Société en commandite par actions* (SCA), 218, 220 *Société en commandite simple* (SCS), 218 *Société en nom collectif* (SNC), 217–218 *Société par actions simplifiée* (SAS), 217–218 *Société par actions simplifiée unipersonnelle* (SASU), 217 Socio-Emotional Wealth (SEW), 33 Spain, 16 Special Rights, 235 Special rules, 206 for agricultural enterprises, 204–205 *Splendor familiae*, 181–182, 184 StAK Libau board, 92 Stakeholder theory, 161 Standard Oil Company, 9 Standardization, 254 of family constitution, 22 Status of literature, 41 consultancy literature, 42–43 scientific literature, 43–49 Stewardship theory, 172 Stichting administratiekantoor (StAK), 90–92

Stock Corporation Act, 18 Störfallanalyse technique, 120 Strategic Interest Group (SIG), 31 Strategic planning, 182–183 Strategic resources family as, 82–83 management of, 84 Succession communities of heirs, 201–202 corporate property as special property, 203–204 different interests affected, 203 distribution and equality, 200 family business, 197–198 interfaces between company and succession law, 198 ownership involves controlling rights and property rights, 202–203 possible company law arrangements, 207–211 replication of rules by contract, 205–207 reserved portion, 200 respective tasks of succession law and company law, 199 special rules for agricultural enterprises, 204–205 succession law arrangements already possible under applicable law, 207 Succession law, 210 arrangements under applicable law, 207 interfaces between company and, 198 juxtaposition of, 237 principle of distribution, 202 respective tasks of, 199 succession law-based inheritance, 199 Successor clause, 209 Survey analyses, 175–176

Tertiary protection, 129 Theorization of family constitution, 21–22 Three-circle model, 31 Three-Lines-of-Defence model, 139 Transgenerational entrepreneurship, 84 Typical content of family constitutions, 35

Ultra-stability, basic dilemma for achieving, 130

Unanimous votes, 235–236 United States, 14–15 US legal literature, 15

Validity, 150 Variables, measurement of, 147 Variance Inflation Factor (VIF), 150 Voice, 95

Wealth, and performance of family businesses, 146–147