How family governance works for shared wealth
Key takeaway
IFC's family business governance framework addresses assemblies, councils and written policies.
The International Finance Corporation, or IFC, describes governance practices for family businesses. Its handbook addresses family participation, the relationships between governing bodies, employment policies and shareholding policies.
Research notice: The governance practices below are attributed to IFC and vary among businesses. The legal examples concern Minnesota trusts, directly owned real property and transferred LLC interests. Other states differ.
What a family assembly is
IFC describes a family assembly as a formal discussion forum for business and family issues. Assemblies are generally open to all family members, although families may restrict membership through age limits, participation rules for in-laws or voting rights.
The assembly provides the setting from which a representative council is elected. The common questions section below explains that body's role.
How a council is organized
IFC's council design discussion addresses eligibility, qualifications, availability and selection. Eligibility policies may address age and experience, exclusion of in-laws, and exclusion of family members serving on the board or in senior management.
IFC identifies limited membership terms as a good practice. It describes a chair appointed by the assembly and recommends a secretary who keeps meeting minutes and makes them available to the family.
What a family constitution covers
IFC's constitution framework describes family institutions, the board and senior management. It sets out their authority, responsibilities and relationships, alongside policies on family employment, share transfers and CEO succession.
The constitution's form and content vary with family size, stage of development and involvement in the business. IFC recommends updating it to reflect changes in the family or business.
Trust roles and settlement procedures
The Minnesota examples below address two specific questions: how directing parties receive authority and how interested persons can settle trust matters.
Directing parties and trust protectors
In Minnesota, for example, a directing party can be one or more persons acting as investment trust advisors, distribution trust advisors or trust protectors. Investment and distribution advisors receive their authority from the governing instrument.
The governing instrument states the trust's terms. It can include court orders or nonjudicial settlement agreements that establish, interpret or modify those terms under applicable law.
Investment and distribution advisors are fiduciaries subject to trustee duties and standards. Their duty or liability may vary only to the extent permitted for a trustee in a similar position and under similar circumstances.
A trust protector is not a fiduciary unless the governing instrument provides otherwise. A protector granted investment or distribution advisor powers is a fiduciary to the extent of those powers.
Ordinary council membership alone does not establish the authority described in this example. Other states differ.
Settling trust questions
In Minnesota, for example, interested persons may enter a binding nonjudicial settlement agreement concerning a trust, subject to statutory limits. Interested persons are those whose consent would be required for a binding settlement approved by a court.
Matters can include interpreting trust terms, approving reports or accounts, trustee resignation or appointment, and trustee compensation.
An agreement is valid only to the extent it does not violate a material trust purpose. Its terms and conditions must also be ones a court could properly approve.
Any interested person may request court approval. Court review can address whether representation was adequate and whether the agreement contains permissible terms.
The settlement procedure does not supply an independent council majority voting procedure. Other states differ.
Shared property ownership and exit
Direct real property ownership and transferred LLC interests are addressed by separate Minnesota rules. Read the direct ownership example for partition of real property. Read the LLC example for the rights associated with a transferred company interest.
Direct ownership and partition
In Minnesota, for example, the partition rule applies when two or more persons hold real property as joint tenants or tenants in common. At least one must have an estate of inheritance, for life or for years.
One or more of those owners may bring an action against the others for partition according to their respective rights and interests. A sale of the property, or part of it, requires that partition cannot occur without great prejudice to the owners.
The rule concerns direct real property interests. It does not establish an automatic sale right for an LLC member. Other states differ.
Transferred LLC interests
In Minnesota, for example, transferring an LLC transferable interest gives the recipient the transferred rights to distributions the transferor would otherwise receive. The transfer does not itself confer management participation or ordinary access to company information.
A deceased member's personal or other legal representative has specified information rights for settling the estate. During dissolution and winding up, a transferee is entitled to an account of company transactions only from the date of dissolution.
The company need not recognize the transferee's rights until it has notice of the transfer. A transfer violating an operating agreement restriction is ineffective against a person who had notice of that restriction when the transfer occurred.
Other states differ.
Policies for a family business
Family employment policies
IFC recommends formalizing family employment policies once a business reaches the sibling partnership stage. Policies should address entry, continued employment, exit and treatment compared with employees outside the family.
Employment policies vary among businesses, and IFC supplies no universal set of employment rules. Its policy discussion does not establish an employment entitlement.
Shareholding and exit policies
IFC's shareholding discussion addresses ownership eligibility, including whether in-laws and other related family members may own shares. It also recommends defining mechanisms for family members who prefer to sell their shares for cash.
These are policy topics. They do not establish a mandatory redemption right or guarantee liquidity.
Common questions
What is the purpose of a family council?
A family council coordinates family interests in the business, according to IFC. Elected from the family assembly, it links the family with the board and senior management and drafts or revises family policies.
Council composition, structure and functioning differ among businesses. See how a council is organized for selection, leadership and meeting records.
Does IFC's constitution framework establish whether a family constitution directs trustees?
No. IFC's framework describes governance institutions and business policies without establishing a conclusion about a constitution's legal effect on trustees or amendment of trust terms.
See the Minnesota trust examples for directing party authority and settlement procedures. Other states differ.
Where should I start when reading about a shared property exit?
Start with the example matching the form of ownership. The direct ownership section discusses partition, while the LLC section discusses transferred company interests.
Resources to check out
- IFC: Family Business Governance Handbook: Guidance on councils, constitutions, employment and shareholding policies.
- Minnesota: Directed trusts: Statutory text on advisor and protector roles.
- Minnesota: Nonjudicial trust settlement agreements: Statutory text on settlement requirements and limits.
- Minnesota: Partition and sale: Statutory text on partition of directly owned real property.
- Minnesota: Transfers of LLC economic interests: Statutory text on transferred distribution interests.