The will is fundamental to succession planning in the family business
Family protocols and shareholders’ agreements are essential instruments for regulating the governance and transfer criteria of the family business. However, succession mortis causa (that is, the transfer of rights and assets upon death) is not governed solely by what has been agreed in such arrangements, but also by the provisions of the will and, failing that, by the mandatory rules of succession law.
In this article, we examine why family agreements and/or protocols are insufficient unless they are properly aligned with an effective will. We also consider which testamentary clauses are useful in safeguarding the family business and how they should be structured with sound technical precision.
The will in contrast to shareholders’ agreements in the family business
It is very common for business families to put in place shareholders’ agreements or family protocols to address matters such as:
- Criteria governing the admission and exit of family shareholders.
- Mechanisms for the valuation of shareholdings.
- Rules on governance and decision-making.
- Rights and obligations of family members who are involved in management and those who are not.
These instruments are useful and advisable, as they promote stability and reduce the risk of conflict while the shareholding entrepreneur remains alive. However, they present two structural limitations:
- They do not bind third parties, nor heirs or forced heirs who have not signed them, nor do they alter the regime of reserved shares or the order of succession prescribed by law.
- Accordingly, in the absence of proper coordination with the will, family protocols may amount to little more than statements of good intent, losing much of their effectiveness if the entrepreneur does not include aligned provisions in his or her will.
The will as the central pillar of succession planning
A will is the unilateral legal instrument through which an entrepreneur may arrange his or her succession in accordance with personal wishes, within the limits imposed by law.
Through it, one may (and should):
- Allocate shares or equity interests in a specific manner.
Establish legacies and preferential allocations.
- Impose charges and conditions requiring continued ownership.
- Set out valuation mechanisms and compensation arrangements among heirs
All of the foregoing with the aim of preserving the business as a going concern and preventing succession disputes.
The Socini clause as an essential provision of the will in the family business
The Socini clause is a traditional testamentary provision which allows a forced heir to choose between two alternatives:
- To receive a share of the estate exceeding his or her reserved portion, but subject to the charges or conditions imposed by the testator.
- To receive only the strict reserved portion, free of encumbrances, should he or she decline to accept the conditions imposed.
This device has traditionally been upheld in case law, as it allows conditions to be imposed upon forced heirs without infringing the statutory prohibition on encumbering the reserved portion, as set out in Article 813 of the Civil Code.
In the family business context, the Socini clause is frequently used to:
- Grant extensive usufructuary rights to the surviving spouse.
- Impose temporary restrictions on shareholdings.
- Establish mechanisms ensuring continued ownership within the business.
- Define valuation formulae for the distribution of the estate or to facilitate the exit of shareholders.
Key testamentary clauses to safeguard the family business
Succession planning in the family business should not be confined to the inclusion of a Socini clause. It is essential to incorporate complementary provisions, among which the following are particularly noteworthy:
a) Legacies of shares or equity interests subject to conditions
They allow ownership to be concentrated in certain heirs, while providing financial compensation to the others.
b) Preferential allocations with financial compensation
They grant one heir a preferential right of acquisition, subject to an obligation to compensate the others.
c) Predefined valuation mechanisms
Objective criteria (such as EBITDA multiples or independent expert valuations) reduce the scope for disputes among non-managing heirs.
d) Temporary restrictions on disposal
Restrictions on the transfer of shareholdings strengthen stability following the death of the testator.
e) Protective clauses against third parties
They prevent the entry of non-business spouses or third parties who are external to the family shareholding.
f) Express reference to the family protocol and shareholders’ agreements
Incorporating these rules into the will confers genuine succession effect upon them.
g) Appointment of an administrator of the estate
Particularly advisable where the heirs are minors or young adults.
How to coordinate the will with the corporate and family structure
Effective succession planning does not consist in drafting an isolated will, but in constructing a comprehensive legal framework in which the will, shareholders’ agreements and family protocols are fully aligned and properly coordinated.
This approach requires the coordinated involvement of specialists in succession, commercial and tax law, in order to ensure solutions that are legally valid, enforceable and practically effective.
At Devesa, we place at our clients’ disposal our experience in advising entrepreneurs and family business groups seeking to structure and safeguard their business succession.
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