Legal mechanisms to guarantee the position of the family in family business M&A processes

Family businesses make up 85% of the business fabric in Spain and play an essential role in the economy. Their identity is built on values such as tradition, resilience and long-term commitment. However, their unique structure, where business management, wealth and personal relationships are intertwined, poses particular challenges when facing an M&A process, especially when it comes to the entry of new investors. Proper legal planning and the implementation of protection mechanisms are crucial to safeguard continuity and family control in these processes. At Devesa, we have advised numerous families on M&A transactions, ensuring a structured transition and mitigating potential conflicts that could jeopardise the family legacy. In this article, we address the most effective legal mechanisms in family business M&A processes to ensure that the family maintains its position and continues to play a key role in the company after the incorporation of new partners.

Legal mechanisms to protect the family in family business M&A processes

1. Continuation clauses in the management of family businesses

One of the most common fears of business families is the loss of control over decision-making. To ensure their presence in the management of the company after the entry of new investors, clauses including the following elements can be envisaged:

• The right to appoint key executives: Allows the family to appoint certain members to senior positions, such as the Board of Directors, to ensure their influence on business strategy and relevant decision-making.
• The right to veto strategic decisions: This clause gives the family the power to block decisions that affect the company’s mission, vision or values, including changes in corporate strategy, major divestments or changes in governance.
• Transition arrangements: Adaptation periods are established during which family members remain actively involved in management to ensure the transfer of knowledge and organisational culture.

2. Clauses protecting the ownership of shares or units

To avoid the break-up of the family’s shareholding control and loss of influence, clauses can be incorporated to regulate aspects such as:

• The right of first refusal: This gives family members the priority to buy shares before they are sold to third parties, ensuring that the shares remain within the family nucleus.
• Shares with special rights: Share classes with preferential voting rights can be created, allowing the family to maintain control despite having a minority stake in the share capital.
• Limitations on the transferability of shares: Temporary or conditional restrictions may be placed on the sale of shares, preventing outside investors from taking control without the family’s consent.

3. Culture and values preservation clauses

One of the key issues in family businesses is the preservation of their identity and founding principles. In order to preserve these aspects, the family can demand:

• The establishment of commitments to the mission and values: In this regard, it is possible to negotiate contractual provisions that oblige new investors to respect the culture and principles of the company.
• The creation of a corporate culture committee: This is a body overseen by the family to ensure that strategies are consistent with family values.

4. Generational continuity clauses

To ensure that future generations of the family continue to play a key role in the company, the following can be put in place:

• Training and succession programmes: Initiatives are created to train heirs in business management and leadership.
• Inheritance rights: These give priority to direct descendants in the assumption of key positions.

5. Controlled exit clauses

In order to avoid an uncontrolled exit of investors and to protect the position of the family, certain mechanisms exist, such as, for example:

• The call option: Through the regulation of call options, the family could acquire shares from the new partners under certain more beneficial conditions.
• Reversion clauses: These set out scenarios in which ownership of the business can revert to the family.

6. Transparency and reporting clauses

In order to maintain control over the development of the company, clauses are established to regulate aspects such as:

• The family’s right to information: Its establishment serves to ensure the family’s access to financial and operational reports.
• The provision of regular reports: Reporting obligations may be established to assess compliance with the agreed agreements.

In conclusion, M&A transactions in family businesses require a specialised legal approach to ensure continuity and family control. The implementation of appropriate contractual clauses protects the family’s position, minimises the risks associated with the entry of new investors and preserves the corporate identity in the long term. Strategic planning and appropriate legal advice are essential for a smooth and sustainable transition.

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