The family constitution: what it can and cannot do

What it is

A family constitution sets out how the family intends to govern its shared interests. It records values, the forums where decisions are taken, the rules for family members joining the business and the principles behind dividends and exits.

It is written by the family itself, and that is the point: the document must reflect the family. A document imposed by advisers is often a document that nobody feels represented by.

What it cannot do

It is not enforceable. Where it conflicts with the shareholders' agreement, the articles or the trust deed, those documents prevail. It therefore cannot:

• Override a shareholder's legal rights
• Compel anyone to sell, stay or vote in a particular way
• Substitute for a properly drafted shareholders' agreement
• Survive contact with a family member who has decided to litigate

Families who mistake a constitution for a contract discover this at the worst moment. The legal architecture must exist alongside it and must say the same things. Your external counsel exists to close that gap.

What it is good at

It settles the questions that law is poor at settling. Should family members be able to join the business straight from university? What qualifications should a family director hold? Is the dividend policy there to fund lifestyles or to fund reinvestment? What does the family expect of an owner who takes no active role?

These are matters of intention. A constitution records that intention while everyone is calm, so the answer already exists by the time emotion has entered the room. The document is worth less and costs less than the arguments you had while writing it.

How to write one badly

McAllen Agency has seen the same pitfalls recur across family constitutions:

• Draft it in a single weekend, off-site, with a facilitator and a template
• Include only the family members who already agree with each other
• Write it in language nobody in the family would use
• Sign it, print it and never open it again

The last one is the most common. A constitution that is not reviewed becomes a historical document, and the family quietly returns to deciding things the way it always did. It is lost, along with the trust in the family's rules of engagement.

A constitution without a family council is merely a set of rules with nobody to apply them. Establish the forum first; then set out, in writing, exactly how it will work.