A family charter, family constitution or family agreement is essentially the same thing - a document that sets out the shared values, aims and objectives of the family as regards the governance of their communal wealth and the family business that generates that wealth. In some cases that may be a trading company, but it may be an investment company or fund too. The agreement is not usually legally binding, but it can have an impact on the drafting of other agreements that are legally binding, like articles of association, shareholder agreements, trust deeds and wills.
"When families say, “Dad always wanted...” or “In our family, we don’t…”, family members are referring to their family’s charter…"
The idea is to record a consensus that can provide a guide for future generations in making decisions that affect all family members. As a result, its value is not necessarily in the detailed making of those decisions – after all who can predict the future? – but in making clear the principles that should underpin them.
All the other constituents of effective governance of family and business rest on the charter. If the charter is correctly and clearly drafted, the rest follow naturally. Disputes are minimised - and just as importantly the fear of those disputes. After all, it is hard to argue that something was not discussed or agreed if it is recorded.
Every business family actually already has a charter – a code that it adheres to. When families say, “Dad always wanted...” or “In our family, we don’t…”, family members are referring to their family’s charter. It’s just that the code is often unspoken and unwritten. The difficulty where a code isn’t articulated and recorded is that, unknown to both of us, mine may be slightly different from yours. If you marry into my business family, can you truly understand the unwritten code to which you are signing up? So, the drafting of a family charter requires tact and care to extract, very careful drafting to record, and an understanding of the knock-on effects of so doing, both in terms of other agreements and wider aspects such as the valuation of shares.
In my experience, family charters are frequently discussed and increasingly common, although not common place, and there is increasing evidence that the family businesses that transition through multiple generations and have fewer family disputes are the ones with a charter. First gaining popularity with the last financial crisis, they have increased as times become more complex. As a family and its business gets larger, its members become more numerous and more separated by age and distance. At the same time, the transition of wealth between generations becomes slower and more complex. There are more structures – family investment companies, trusts, funds etc – and more forms for wealth to take – land, equities, debt - and places for it to be physically and legally located. A strong family charter anticipates and addresses these changes.
In summary, a family charter captures the history of the family business, why it was established and the family’s wider goals and aims, perhaps in the community or in terms of charitable causes. Whilst each family charter is unique, there are topics that they tend to have in common and a solid knowledge of points of interest and difficulty that other families have encountered provides a very helpful start. So, whilst I agree that you wouldn’t download a charter and write your name at the top, a good precedent can provide a helpful place to start – as every good legal draftsman would admit.