A family protocol is a document entered into by the various relatives and family members who hold shares in a family company. It is a useful instrument for the development and management of family-owned businesses, and it is therefore advisable to recommend that such businesses formalise one, as it provides a practical and appropriate framework for their governance.
The concept of the Family Protocol is defined in Royal Decree 171/2007, which describes it as a set of agreements entered into by shareholders among themselves or with third parties with whom they have family ties, affecting a non-listed company in which they share a common interest in establishing a model of communication and consensus in decision-making, so as to regulate the relationships between the family, ownership, and the company as it affects the entity.
The protocol may take the form of a private document entered into by the various relatives and family members who hold shares in the company, but it may also be executed as a public deed, either incorporated into the company's deed of incorporation, appended to the company's articles of association, or simply recorded in a standalone deed.
The DISCLOSURE of the family protocol is therefore VOLUNTARY. The decision rests with the management body, acting in the best interests of the company.
Disclosure outside the registry is also possible, by way of publication on the company's website, provided that the domain name or internet address is registered with the Commercial Registry.
With regard to registration of the family protocol at the Commercial Registry, direct public disclosure is not provided for; only certain formal methods of presenting particulars of the family protocol are available.
The only form of disclosure of the protocol that carries substantive evidentiary weight (enforceability against third parties) is through the registration of corporate resolutions adopted in execution of a published family protocol, which requires that this circumstance be expressly stated and that the corporate resolutions implementing the protocol be executed as a public deed.
HOW DOES THE LAW DEFINE A FAMILY company?
There is no statutory definition of a family company under Spanish law; the only relevant definition can be found in tax legislation. Under Wealth Tax, a full exemption applies to assets used in the course of a business or professional activity, and to shareholdings in operating entities that qualify as "family" businesses. Under Inheritance and Gift Tax, a 95% reduction of the taxable base applies to the value of business assets where the beneficiaries are the spouse (or cohabiting partner), ascendants, descendants, blood relatives, or adopted relatives of the deceased or donor; and, in the absence of all of the foregoing, ascendants and collateral relatives up to the third degree.
In summary, sole traders, that is, businesses operated directly by an individual without a corporate or other legal structure, are entitled to these benefits, provided the individual carries out the relevant economic activity on a regular, personal, and direct basis and that it constitutes their principal source of income. The exemption extends not only to assets owned solely by the trader or professional, but also to assets held jointly with their spouse.
In addition, entities, whether listed on organised markets or not, that do not consist solely in the management of movable or immovable assets are considered family businesses where: an individual holds at least 5% of the share capital or assets individually, or at least 20% collectively with their spouse, ascendants, descendants, or collateral relatives of the second degree, whether by blood, affinity, or adoption; and where either that individual (if holding shares individually) or one member of the family group (in any other case) effectively performs management functions within the company and receives remuneration for doing so that represents more than 50% of their total business, professional, and employment income.
WHAT TYPES OF AGREEMENTS ARE TYPICALLY INCLUDED IN A FAMILY PROTOCOL?
The Family Protocol serves to regulate agreements, the most common of which are:
- Those relating to the composition, operation and decision-making of the corporate governance bodies, and
- Agreements on economic rights, in particular:
- dividend policy,
- periodic valuation of shares or equity interests,
- the distinction between voting rights and economic rights within the company.
- the establishment of an intra-family market for these shares or equity interests, to facilitate the exit of shareholders and ensure liquidity.
SUCCESSION AGREEMENTS:
The family protocol can also help establish the foundations for an orderly and professionally managed succession through succession agreements.
In this way, the question of the company's continuity can be resolved during the lifetime of its owners, by planning the succession in advance.
It will also be highly advisable to plan the succession through a will, as the future of the family company cannot be left to the rules of intestate succession. Consider, for example, the option under Article 442-5 of the Catalan Civil Code (CCCat) which allows a surviving spouse (or cohabiting partner) who inherits intestate to convert their universal usufruct into an entitlement to one quarter of the estate.
Where a will fails to respect the terms of the Family Protocol, the company's articles may allow the beneficiary to be denied shareholder status, with the real value of the transferred shares paid to them in cash instead.
Catalonia has sought to facilitate orderly intergenerational transfers by reforming its succession law to introduce a new system of contractual succession, under which agreements between spouses, partners and family members are permitted (agreements with third parties are not allowed).
This mechanism for triggering inheritance, known as succession agreements, enables the question of company continuity to be resolved during the owners' lifetimes, by advancing the succession process. Indeed, the regulation of succession agreements in Book Four of the Catalan Civil Code explicitly recognises their applicability to the mortis causa transfer of family company assets. The close link between the Family Protocol and the succession agreement is reflected in Article 431-7.1 of the Catalan Civil Code, which provides that the deed of a succession agreement may also incorporate provisions characteristic of a Family Protocol.
CONCLUSIONS ON FAMILY PROTOCOLS:
In summary, the Family Protocol, given its atypical nature, has no fixed content and may govern commercial, succession, family and employment matters that the members of the Family company wish to regulate.
With regard to Family company structures, it is widely acknowledged that the adoption of a Family company Statute, covering civil, commercial and tax matters, remains outstanding, with the aim of harmonising the various regulatory frameworks that currently apply to them.
In addition to sound legal advice in this area, we also recommend mediation as an effective tool for resolving disputes within the family company.
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