Ana Carolina Baraldi Pereira de Mello
Lawyer at Marcos Martins Advogados
In Brazil, 90% of companies are family-owned. Family businesses are passed down from generation to generation and, in general, in this transition they face challenges of continuity, succession and leadership; 95% of family businesses are extinguished in the process of succession to the second or third generation¹.
The high mortality rate of family businesses is linked to a lack of planning and internal disputes arising from divergent interests between the partners. Companies inevitably fail to overcome these conflicts, which often end up in long and exhausting legal proceedings.
Family businesses are certainly much more complex than non-family businesses, given their peculiarities. Generational transitions are one of the challenges, since a successful approach that has already been used may not achieve the same result with new generations, which often leads to internal conflicts that end in corporate disputes, the breakdown of the affectio societatis and extinction.
How can this issue be tackled? The success of this generational transition depends on a specific analysis of the company, subjective definitions of strategies, structures and processes and, most importantly, on the company’s representatives being open to the new changes needed to adapt to the new business environment.
In order to facilitate the transition and continuity of the company, we suggest the implementation of corporate governance processes as a starting point, followed by the implementation of the three circles model and the division of those involved into rooms².
Corporate governance consists, in a nutshell, of defining processes and structures that support decision-making, defining who makes what kind of decision and on what basis.
The model of three interconnected circles divides those involved into three groups: family, business and ownership. Through this model, the participants can interact with each other and, depending on their position, have a business view from 7 (seven) different perspectives.
The relationship between the circles and the position of the members can change over time, making them increasingly defined and still maintaining harmony, business and family unity and, most importantly, the success and continuity of the enterprise.
After implementing corporate governance and the circle model, it is important to define the direction of the business and its priorities, for example: growth, liquidity, risks, family harmony, sustainable development. These definitions will lead to the definition of the business profile.
After structuring governance and the three-circle model, we suggest implementing the four-room model: Family Room, Shareholders’ Room, Board Room and Management Room.
In this model, each room has its own role and therefore decides on different, previously defined issues.
This form of management is effective for the perpetuity of the company, but it does not prevent conflicts in management.
In the event of conflict, with the same aim of honoring the company’s success, we suggest the use of mediation, in accordance with Law No. 13,140/2015, a safe and confidential method.
Often, when conflicts arise, family members turn to a lawyer for a solution, as an alternative to using the usual legal route, and mediation often proves to be more effective than arbitration.
Mediation allows the parties, together with their lawyers and mediators, to talk to each other in order to reach the best solution to the conflict. The confidentiality of mediation avoids exposing the company and those involved and, therefore, damaging the business.
Other benefits are that this form of conflict resolution is less costly and allows the real interests of the family partners and the peculiarities of the company to be taken into account in the search for a solution, which is often mitigated in court proceedings and arbitration, since in the latter cases the parties will be subject to a final decision handed down by a third party.
Finally, mediation removes all the wear and tear and time spent ona legal dispute and even arbitration.
Thus, the continuity of family businesses requires the implementation of professional management and, to this end, we suggest the implementation of corporate governance and the system of the three circles and rooms. With the same intention of preserving the company and the success of the business in a competitive manner, without drastic disruptions and in line with the profile of family shareholders, we suggest that any disputes be submitted to mediation, interceded by lawyers and mediators.
Marcos Martins Advogados is able to assist in the implementation of corporate governance, the circles and rooms model in family businesses, as well as assisting its clients in any disputes through the mediation method. In addition to being able to identify the structure best suited to the profile of each company.
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¹BRASIL, IBGE. Demographics of companies, 2015. Available at: IBGE. Accessed on: Feb. 25, 2019
²The three circles model was developed at Harvard University in 1978 by Prof. Renato Tagiuri (who died in April 2011, aged 91) and doctoral student John Davis to explain the dynamics, different functions and potential tensions in family business systems. Despite being 40 years old and proving to be very effective, its implementation has not yet been widely used.
