The family business confronting its greatest challenge: time
Family businesses represent in Spain more than 85% of all companies and generate more than 60% of private sector GDP. Yet the continuity statistics are discouraging: only 30% reach the second generation, 13% the third and fewer than 5% the fourth.
The principal enemy of family business continuity is not competition, technology or the economic cycle. It is the absence of clear agreements on how decisions are made, who can join the business, how profits are distributed and what happens when a family member wants to exit or when the founder is no longer there.
The family business protocol is the instrument designed to answer these questions before they generate conflict. This guide explains what it is, what it governs, how it is formalised and how it relates to the other corporate governance instruments.
Legal nature: what force does the protocol have?
The first question business-owning families ask when the protocol is discussed is: “what if my child does not comply with it?” The honest answer is: it depends.
The family protocol is not a unitary legal instrument. It is a complex document that can combine different types of commitments with different legal effect:
Moral and coexistence commitments
The greater part of the protocol — family values, the principles that should guide the company, behavioural commitments — are moral commitments without direct legal effect. Their observance depends on the willingness of the signatories and family culture. This does not make them less important: a protocol that genuinely reflects the family’s values and agreements has a cohesive force that no contract can generate.
Commitments with the effect of a shareholder agreement
Protocol clauses governing aspects such as share transfers, pre-emption rights, dividend policy or exit mechanisms can be structured as a shareholder agreement (pacto parasocial) between the signatory shareholders. In that case, they have the same legal effect as any shareholder agreement: they are enforceable between the signatories, though not against third parties, unless registered at the Registro Mercantil.
Commitments incorporated into the articles of association
Protocol clauses affecting corporate functioning — restrictions on share transfers, voting rules, board composition — can be incorporated into the articles of association. In that case, they are enforceable against all shareholders, present and future, and against third parties.
Succession planning commitments
Commitments regarding the testamentary or inheritance destination of shares are the most legally delicate. In Spain, a will is freely revocable and the forced heirship rights of compulsory heirs limit the testator’s freedom. The protocol can anticipate these commitments, but for them to have real effect they must be complemented by appropriate legal structures: share donations with charges and conditions, family holding structures, trusts (in jurisdictions that allow them) or testamentary trusts.
RDL 171/2007: registration of the protocol at the Registro Mercantil
Royal Decree 171/2007 of 9 February, on the publicity of family protocols, created the mechanism for registering family protocols at the Registro Mercantil in Spain. It is a brief but practically significant regulation.
What it allows
RDL 171/2007 allows the existence of the family protocol to be registered at the Registro Mercantil without revealing its content. Registration produces two effects:
- Certain date: the protocol has a date of existence that cannot be challenged.
- Publicity of existence: any third party consulting the company’s registry sheet knows that a protocol exists, even though they cannot know its content.
What it does not allow
Registration does not make the protocol enforceable against third parties — creditors, buyers of shares. For that, the relevant clauses must be incorporated into the articles of association.
Requirements for registration
To register the protocol at the Registro Mercantil:
- The protocol must be formalised in a public deed before a notary.
- The deed must be presented to the Registro Mercantil of the registered address.
- If the protocol modifies or supplements the articles, the articles must expressly refer to the protocol.
- Any subsequent modification of the protocol must also be registered.
Typical content of a family protocol
Block I: Identity of the business-owning family
Mission and values. A description of the family business’s mission — what it wants to be and why it exists —, the values that should guide it and the commitment to continuity. This block is the most emotional and the least legal, but it is frequently the most important for building family cohesion.
History and legacy. A description of the company’s history and its founders, the family capital accumulated and the legacy to be preserved. It serves to anchor the protocol in the family’s reality and give meaning to the rules established.
Block II: Family corporate governance
Family assembly. The forum bringing together all family members — shareholders and non-shareholders, those active in the business and those not — to share information, discuss the future and maintain cohesion. The family assembly has no formal decision-making powers but is the space where consensus is built.
Family council. If the family is sufficiently large and complex, the family council is the governance body of the family as such: it manages the relationships between the family and the business, interprets the protocol and acts as an interlocutor with the board of directors. It has advisory and initiative powers, not executive ones.
Board of directors. The composition of the board — how many family members, how many independents, who proposes each director, what are the requirements to be a family director — is one of the most delicate aspects of the protocol, as it determines the balance between the family and external professionals.
Criteria for employing family members. One of the most conflictual aspects in family businesses is who can work in the company and under what conditions. The protocol should establish: minimum qualification or experience requirements for employment in the company, objective selection procedures, remuneration policy for employed family members (the same as non-family members in the same role? different?), and mechanisms for regular performance evaluation.
Block III: Ownership and succession
Dividend policy. The profit distribution policy is frequently a source of tension between family members with different financial needs. The protocol should establish: a minimum percentage of net profits to distribute annually, the decision mechanism for distributing beyond the minimum, and the reinvestment policy for business development.
Share transfers. The rules on who can be a shareholder and how shares are transferred are the legal core of the protocol. They typically include: pre-emption rights of other family shareholders, restrictions on transfers to persons outside the family, share valuation mechanisms for intra-family transfers, and drag-along and tag-along rights.
Exit mechanisms. The protocol should provide for how a family member who does not wish to remain a shareholder can exit. Common mechanisms are: right to sell to the other shareholders at market price (with an agreed valuation mechanism), company or shareholder option to purchase the exiting member’s shares at a pre-determined price, and periodic liquidity clauses (the company or shareholders acquire the shares of anyone who wants to exit in agreed time windows).
Succession planning. The protocol should address succession planning principles, even if the specific instruments — wills, gifts, holding structures — are external to the protocol. Principles may include: whether the company will be transferred equally among all children or whether priority will be given to those actively involved in the business, how heirs who do not receive company shares will be compensated, and the timescales and conditions for management transition.
Protocol drafting process
Phase 1: Diagnosis and awareness-raising
The process should begin with a diagnosis of the current situation of the family and the company: ownership map, family structure, roles and functions, main sources of tension and the expectations of each family member.
Phase 2: Working sessions with the family
Drafting the protocol is a family negotiation process facilitated by an external adviser — typically a lawyer specialising in family business and/or a family mediator with business experience. Working sessions with the family are the core of the process: in them, existing agreements are identified, as are disagreements and taboo subjects that have never been discussed but are the source of latent conflicts.
Phase 3: Drafting and review
The draft protocol must be reviewed by all family members before approval. It is important that each member feels their interests are represented and that the agreements are genuine, not imposed.
Phase 4: Formalisation
Once the protocol is approved, it is formalised in the appropriate legal structure: public deed for registry registration, amendment of articles for clauses that must be incorporated, signing of the shareholder agreement for contractual clauses, and planning of the necessary succession instruments.
Relationship with the shareholders agreement
The family protocol and the shareholders agreement are complementary documents with a clear hierarchy: the protocol establishes the principles and values; the shareholders agreement translates them into legally enforceable rules.
In practice, many family businesses have a single document combining both — variously called a family protocol, shareholders agreement or family agreement — which contains both the moral and coexistence provisions typical of a protocol and the contractual clauses of a shareholders agreement.
What matters is not the name but that the document is genuine — reflecting the family’s actual agreements, not a generic template —, is well drafted legally and has the appropriate structure to be enforceable in the parts that should be enforceable.
Conclusion: the protocol as an investment in continuity
Drafting a family protocol is an investment in the business’s continuity. The drafting process — with its working sessions, debates and agreements — builds family cohesion, clarifies expectations and prevents conflicts. And the resulting document gives the company the structure needed to face the most difficult transitions: the founder’s succession, the entry of the second generation and the arrival of external investors.
At BMC we accompany family businesses in the design, negotiation and formalisation of their family protocol, integrating legal advice with facilitation of the family process.
