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Due to social changes, the legal trend of the next decade may be the creation of a family constitution – was said the other day at a background discussion organized by the Hungarian National Chamber of Notaries. As the leaders of the chamber said, the managers and owners of family businesses founded in the early nineties have reached such an age that

succession has become a basic issue for many businesses.

If the owner or the sole manager of such a business leaves the ranks of the living without taking care or organizing the transition in advance, the company’s operation, as well as the family’s assets, may be at risk.

In a turbulent economic situation

More than once, the problem is that none of the descendants is willing or able to carry on the family company. In such cases, the business is often sold or closed after the death of the testator.

According to a survey published this spring by the international consultant PwC, forty percent of family businesses do not have a succession plan, they do not have a strategy for how the company can remain operational even after the death of the leader. Although, as a result of the coronavirus epidemic, the successors were more involved in the operation of the company than before, the research revealed, the current leading generation is less willing to hand over control in the current turbulent economic situation.

However, it is worth taking care of the succession and inheritance of property in advance not only to prevent family disputes, but also for the future of the business.

Upon the death of the testator, the property is immediately transferred to the heirs, but the leadership position is not.

and moreover, because of the probate process, months pass, while bills, contracts, wages are not paid or more important decisions are not made.

The Buddenbrook effect

Postponing decisions related to the family company and family assets is also dangerous because the lack of conscious planning can lead to the occurrence of the Buddenbrook effect, i.e. to the fact that the assets built by the first generation are maintained by the next generation and lived on by the third generation.

Ádám Tóth, president of the Hungarian National Chamber of Notaries he believes, that the family constitution, which is actually the summary name of several documents, can be considered as a solution. In other words, a contractual matrix – a set of property law, gift contracts, wills – in which it is possible to determine who has what rights and obligations in the operation of the family property or the business that embodies it. It can also be arranged how the ownership or management role of each family member is separated.

Zsolt Kalocsai, President and CEO of RSM Hungary Tax Consultants Zrt according to the family constitution also includes almost all regulations affecting the family company and beyond, which may affect the day-to-day and future operation, inheritance, and operative and non-operative participation of family members in the company. At the same time, they can also regulate issues that go far beyond this, such as who can withdraw how much income and in what form from the company.

Of course, the family constitution is not an all-powerful miracle weapon, since it cannot be enforced in a legal sense, but it provides excellent guidelines for the settlement of all issues directly and indirectly affected by it.

Without generational conflicts

The role of family businesses in the world economy is becoming more and more important. The Family Firm Institute data According to

In Western Europe, family constitutions were already widespread decades ago, which, in addition to the expectations regarding the operation of the business, also regulate the order of generational change.

Balázs Arató, lawyer, university associate professor in his opinion article as an example to be followed, he cites the almost century-old family constitution of a well-known international clothing company, which must be accepted by each family member who acquires a share in the business. This obligation is also included in the founding document of the company, i.e. those who are not willing to make the declaration of acceptance cannot become a member of the company.

The family constitution also lays down the principles to be followed during the change of generations. The current manager of the company is obliged to retire upon reaching a certain age (in their case, 55). This means that, in addition to handing over the management licenses, you must also dispose of a certain proportion of your company shares. The purpose of this provision is that the former manager no longer has a majority influence on the decision-making of the company’s main body, and only has a share of the business that provides him with adequate dividend income.

Based on the family constitution, the new manager of the company acquires the share of the business that is subject to the alienation obligation on a market basis, and in exchange for a consideration calculated taking into account the company’s value. If this exceeds the successor’s financial capabilities, the company or its members will credit the missing amount with a strict repayment obligation.

However, the retired manager still does not completely distance himself from the company. His main task will be the management of the family foundation, the organization of local affairs and charity activities in the spirit of social responsibility.

You should also be available when the younger generation running the company needs advice.

This construction has been operating without generational conflicts for decades. In addition, his influence is felt not only in the management of the company, but also among the employees, since it is not uncommon for father and son to be employed by the company at the same time.

(Cover photo: Fadel Dawod/Getty Images)