Family-owned enterprises: protection of relatives and of sustainable generation exchange

Roberta Falciai
Studio Legale Munari Cavani, Milan

Italian laws expressly acknowledge the existence of family-owned enterprises, which are generally perceived, for a variety of reasons (including sociological, historical and cultural issues) as one of the primary expressions of business societies. In general terms, Italian legislation admits protection and, to certain extent, directly safeguards the interests involved in those types of enterprises appreciating the value of diversity underlying a family-based structure. In particular, the actual commitment of relatives and spouses within a family-enterprise is considered and protected by legal provisions in view of ensuring stability, equal treatment and proper succession of relatives in the management of the enterprise.

The Italian approach aims at a twofold objective, and in particular: 

• Protecting relatives, however involved in the family-business, from possible abuses of the entrepreneur and/or of the management; and 
• Ensuring stability, either by means of corporate contractual devices or express legal provisions, to the family business, both during life of relatives (choosing appropriate corporate governance stances) and in case of death of key-people.

Protection of relatives

As to the first objective section 230-bis et seq of the Civil Code is noteworthy in that it expressly ensures protection to relatives working for the family’s enterprise by automatically granting those individuals, inter alia, the right to receive profits, a pre-emption right in case of business transfer and the right to decide upon major resolutions involving the future of the enterprise. All these rights are granted independently from the role or function (more or less formally) held by the single individual. Indeed, such rights shall be recognised on the basis of a de facto perspective, ie, in proportion to their effective contribution to the family enterprise, independently from official recognition of roles within the bodies of the enterprise.

This provision mirrors the Italian perspective which aims at encouraging family-based enterprises in view of their different approach to business and to governance such as informality, cooperation and stability.

Generation exchange: the family pacts

Rather invariably, one of the major issues is the death of the entrepreneur which may trigger a halt of business, hindering stability and continuity. This necessity always found a strong legal obstacle to find appropriate protection due to a legal prohibition to enter into any form of agreement with third parties to dispose of a future hereditary succession.

In order to mitigate this hurdle and in consideration of the importance of smooth succession of those heirs showing in life a true interest in family-business, Italian legislator recently admitted a crucial exception to this basic principle. Law 14 February 2006, no 55, introduced a set of new provisions in the Civil Code (namely, sections 768-bis/768-octies) regulating the so-called ‘Family Pacts’ (patti di famiglia), which expressly permit disposal of hereditary succession even during the lifetime, and which may significantly deviate from the traditional succession schemes enshrined in the provisions of the Civil Code.

In particular, Family Pacts qualify as contractual arrangements which may be used by the entrepreneur to wholly or partially transfer the business (or, in case of corporate bodies, to transfer the shareholding) to one or more heirs who are showing to be more interested than others to the continuity of the enterprise. So as to guarantee transparency to the deed, the Family Pacts are signed before a notary public and with the attendance of the spouse and/or of other preferred heirs (legittimari), who are entitled to receive from the beneficiary the liquidation of their part of the inheritance, unless they expressly waive such right.

Family Pacts’ rationale is to regulate in life the generational passage by permitting the entrepreneur to define his hereditary succession with regards to his business or to his shareholdings, therefore avoiding after effects usually affecting any enterprise. Stability and continuity of family-business are the objectives of Family Pacts, allowing the entrepreneur to plan during life who will be the best heir-entrepreneur, in terms of a true economic perspective.