How family business leadership passes to the next generation

Research notice: These are governance recommendations, not legal requirements or a fixed timetable. The legal examples below concern Minnesota corporations and LLCs. Other states differ.

In Minnesota, for example, transferring an LLC transferable interest does not itself give the transferee management rights, and other states differ.

• This rule applies to whole or partial transfers, subject to §322C.0504.
• The transferee receives the distribution rights covered by the transfer, according to its terms.
• The LLC need not recognize the transferee's rights until it has notice of the transfer.
• A transfer violating an operating agreement restriction is ineffective as to a person who had notice of that restriction at the time of transfer.

In Minnesota, for example, corporate business and affairs generally fall under board direction, and other states differ.

Under §302A.201, that rule is subject to §302A.457 and contrary provisions in the articles. If the articles assign board powers and duties to other natural persons, those persons assume the corresponding director duties, liabilities and responsibilities. Directors are relieved to that extent.

Holders of shares entitled to vote for directors may take action the board is required or permitted to take by unanimous affirmative vote. For that action, the shareholders collectively and individually assume the corresponding director duties, liabilities and responsibilities, and the directors are relieved of them.

In Minnesota, for example, the corporate CEO generally has active management and specified signing duties, and other states differ.

Under §302A.305, these duties apply unless the articles, bylaws or a board resolution consistent with them provide otherwise. They include general active management and signing and delivering deeds, mortgages, bonds, contracts and other business instruments in the corporation's name. Signing authority may instead belong to another person when required by law, or be expressly delegated by the articles, bylaws or board to another officer or agent.

IFC notes that many family business advisors recommend beginning CEO selection early, especially when the next CEO is expected to come from the family.

When candidates come from the family or current employees, IFC recommends a career development system with education, training and periodic feedback on performance within the company. This is governance guidance, not a legal requirement or a fixed preparation timetable.

IFC describes hiring an external CEO as an option when suitable candidates are unavailable within the family or current workforce.

In that situation, IFC recommends that a board committee lead succession planning and set selection criteria before searching for candidates. This is governance guidance, not a requirement to hire externally.

IFC recommends management incentives based on performance rather than family ties.

Its recommendations also call for a formal structure clearly defining senior management responsibilities around current and future business needs. A clear family employment policy should be available to all family members. These are recommended practices, not legally required compensation formulas.

In Minnesota, for example, corporate CEO and CFO vacancies must be filled, while other officer vacancies may be filled, and other states differ.

Under §302A.341, vacancies arising from death, resignation, removal, disqualification or another cause are filled for the unexpired portion of the term. The procedure comes from the articles, bylaws, board determination or §302A.321.

Officer removal follows these rules:

• The board may remove an officer at any time, with or without cause, by a resolution approved by a majority of directors present.
• The CEO may also remove an officer the CEO appointed at any time, with or without cause.
• In a corporation that is not closely held, the CEO may remove an officer elected or appointed by the board, other than the CFO, to the extent authorized by the articles, bylaws or a resolution approved by a majority of directors present.
• These removals remain subject to shareholder control agreements and preserve the officer's contractual rights.

Once an adequate successor has been selected, IFC recommends a clear transition process for both the current CEO and successor.

The process should specify the transition date and define the departing CEO's involvement after retirement. Possible continuing roles include advice to the successor, board membership and additional activities. This is governance guidance, not a legal requirement.

In Minnesota, for example, an LLC defaults to member management, and other states differ.

Under §322C.0407, the operating agreement may instead specify manager or board management, expressly or through words of similar import. Nonprofit LLCs have a separate exception under §322C.1101, subdivision 5.

Where the operating agreement does not otherwise govern the matter, and subject to §322C.0110's restrictions, these member management defaults apply:

• Management and conduct of the company are vested in the members, with each member having equal management rights.
• A majority of members may decide differences arising in the ordinary course of the company's activities.
• Acts outside the ordinary course require all members' consent.
• Amending the operating agreement requires all members' consent.

In Minnesota, for example, a manager of an LLC managed by managers need not be a member, and other states differ.

Under §322C.0407, subdivision 3, the following defaults apply where the operating agreement does not otherwise provide, subject to §322C.0110's restrictions:

• A majority of members may choose a manager at any time.
• A majority of members may remove a manager at any time, without notice or cause.
• A manager remains until a successor is chosen unless the manager earlier resigns, is removed or dies, or a manager that is not an individual terminates.
• Dissociation of a member who is also a manager removes that person as manager.
• Ending the manager role alone does not end that person's membership.
• Ceasing to be a manager does not discharge debts, obligations or other liabilities to the LLC or members incurred while serving as manager.