Family protocol and challenges to corporate resolutions

Family protocol and challenge of corporate agreements, the eternal dilemma, experts of CECA MAGÁN Abogados

6 May 2024

It is common knowledge that it is not only highly recommended but almost essential to guarantee the survival of the family business (although there are always exceptions that confirm the rule), the preparation, drafting and approval of a good Family Protocol which, to work, must be tailored to the specific case because “no two family businesses are the same”.

In that agreement or framework agreement that is every Family Protocol, very heterogeneous aspects are usually regulated, related both to the family business and to the entrepreneurial family and its members and the relations between both, from aspects of more ethical, moral or social content, related to the shared values, the mission or legacy of the family business, to issues of a more strictly family nature (education of the new generations, requirements for the eventual incorporation of family members into the company) to succession and matrimonial issues and, of course, corporate matters (restrictions on the transferability of shares, accessory benefits, enhanced majorities for the adoption of resolutions, special rights, organizational structure, voting syndications, etc.). ).

As is logical, the Protocol binds all its signatories, who are therefore obliged to comply with everything agreed therein and even to exercise their rights within the family company in accordance with its contents.

However, precisely because the Family Protocol is an agreement or contract outside the family company and its organizational structure, it is recommended that those contents of the same that regulate aspects that affect the operation of the family company be, as far as possible, incorporated into the Articles of Association, which is the rule that governs the corporate operation of the family company.

However, this is not always the case, for different reasons: sometimes due to simple negligence; sometimes because it is preferred to maintain confidentiality, as opposed to the inevitable registry publicity of the articles of association; sometimes simply because there are aspects that cannot be incorporated due to their doubtful compatibility with the mandatory rules that govern the specific type of company or its principles.

And it is then when the conflict can arise: when some of the family members signing the Family Protocol who are also partners adopt corporate resolutions whose content implies non-compliance with said Protocol but which, nevertheless, are impeccable in accordance with the Law and the Articles of Association and cannot be clearly considered as contrary to the corporate interest.

Examples and judgments of corporate agreements contrary to the Family Protocol

Despite the authoritative voices in the scientific doctrine advocating the opposability of omnilateral parasocial agreements to the company (Paz-Ares, Noval, Alfaro, Iribarren), with one or another legal basis, our Supreme Court remains firm in declaring their unenforceability based on Art. 29 of the TRLSC, so that validly adopted corporate resolutions cannot be annulled for the sole circumstance that they are contrary to omnilateral parasocial agreements, among which we can include for these purposes the Family Protocols.

To understand to what extent this formally impeccable position can lead to serious material injustices, I recommend the interested reader to read the post by Professor Cándido Paz-Ares entitled “The betrayal of Elmer”, who presents a practical case with literary overtones that exemplifies in a very graphic way - even dramatic - the problem we are raising here. It is true that, on some occasions (some recent ones, such as the STS of April 7, 2022), our highest Court has annulled some corporate agreements contrary to Family Protocols or shareholders' agreements based on the principle of good faith and abuse of rights of the defendant partners, but certainly the statistics are not very encouraging in this regard.

Advice on how to avoid this conflict

What should be done to avoid or, at least, minimize this serious and common problem in family businesses when conflict or confrontation arises among its members?

Several recommendations should be implemented to avoid or prevent these “betrayals” of the Family Protocols by some of the signatories.

In the first place, the simplest and most effective one: to formally incorporate all those agreements included in the Family Protocol that are possible through the corresponding modification of the bylaws. If Elmer's grandfather, before donating the majority of the capital stock to his grandson, had modified the bylaws to introduce a reinforced majority for certain relevant corporate resolutions that would guarantee him veto rights with his minority shareholding, Elmer would not have been able to validly agree to the merger of the family company with that of his worst enemy and competitor, granting the latter the majority in the merged company.
Secondly, if there are some agreements that affect the operation of the company, its organizational structure, the rights and duties of the partners, which are of doubtful registrability or, directly, are not registrable, the incorporation of the obligation to comply with the Family Protocol as an accessory performance can be tested in the corporate bylaws, incorporating as a sanction the loss of rights (such as voting and/or dividend) or even the exclusion of the non-compliant partner (ideally, with a penalty in the redemption value of its participation), which will undoubtedly produce, beyond its coerciveness or sanctioning function, a preventive function that will discourage to a large extent some temptations of non-compliance with the Family Protocol.
Thirdly, the Protocol itself should provide for effective contractual sanctions in the event of fraudulent non-compliance with the Protocol, beyond mere compensation for damages, which will often be very difficult to prove and quantify. Thus, for example, fast, effective and confidential alternative dispute resolution mechanisms; the duty of the defaulting partner to dispose of his shareholding to the other partners and family members, with the granting of an irrevocable power of attorney for its execution to an independent third party or to the majority of the signatories (forced sale); etc.
Fourthly, it is no less important to keep the Family Protocol alive, complying with it and enforcing it, without putting it in a drawer or letting it sleep the sleep of the just, since, if that happens, when conflict or serious non-compliance arises, it will be difficult to try to impose its compliance by those who have also been ignoring it for years, as our Supreme Court has also already stated in its judgment of May 5, 2023.

Our family business lawyers are used to dealing with this type of situations, so they can help the business family at all times, both during the protocol creation phase and, afterwards, during its implementation phase. Contact them here.