Family Protocols: Range and Scope in IGJ Recent Resolution

A.    IGJ Registration 

On December 20, 2021, General Resolution No. 19/2021 of the Argentine General Inspection of Justice (the “IGJ,” after its acronym in Spanish), Public Registry of Commerce of the City of Buenos Aires, became effective, authorizing the voluntary registration of family business protocols of commercial companies registered with the agency.

The Resolution defines “family business protocol” as the instrument carrying that name that is subscribed by all the company partners whose members are related by blood and/or marriage, even if also signed by third parties who are not partners or relatives. Such family ties must be recorded in a public deed or private instrument with certified signatures.

Protocol registration with the IGJ has the sole effect of allowing third parties to know its existence and scope, without implying any legal presumption of knowledge or of legality of its clauses.

Only one protocol can be registered per company and any subsequent registration will be considered as an amendment and/or substitution of the previous one. If not updated, the registered family protocol will be presumed to be in force.

Registration must be requested by the administrative body, accompanying the respective minutes and the agreement of all the partners with the registration (whether it arises from the same text or from a separate instrument). The request must be accompanied by a professional pre-qualification report stating that the requirements for registration have been met.

We consider the issuance of this Resolution by the IGJ to be a breakthrough, since it expressly recognizes such parasocial agreements, allowing third parties to know of their existence and scope. Thus, an instrument that was already in use and that is essential in the administration and permanence of a family business is legally crystalized, maximizing its effects.

B.    Concept and Characteristics

Despite the development of sophisticated financial markets, in most countries, including Argentina, family-owned companies are still a central element and engine of the economy.

Some differentiating features of these types of companies are the following:
-    The ownership of the company is concentrated in a family group. As more generations pass through, ownership is divided into more branches or kinship groups.
-    Some members of the family group participate in the governance or management of the company.
-    There is a desire for continuity, for the transmission of the family's own business values.

Thus, family companies have many advantages and disadvantages.

Advantages include trust among family members and mutual benefit interest. The desire to generate value on a project that will benefit one's own kin also favors the development of this type of business, making its founders and continuators pursue long-term value creation as a common goal.

In these companies, there is flexibility to distribute profits in ways that suit each family’s needs, without necessarily respecting professional market patterns (although this characteristic could be a disadvantage in some cases). This encourages self-financing and the development of long-term investment projects and strategies.

Disadvantages, some, on the other hand, relate to management. Capital ownership is often confused with the professional capacity to manage, so that unqualified people are placed in managerial positions. Similarly, there may be inconsistencies in remuneration between family and non-family members and other types of tensions with professional managers outside the family, so that the remuneration guidelines do not adequately reflect effort and merit.

Family kinship between owners and managers has an impact on decision making and can lead to disruptions in the company, in intra-family relationships and in the relationship between shareholders.

C.    Protocol Function

The family protocol is essentially an instrument that aims to mitigate or solve part of the above-mentioned problems by establishing management rules and foreseeing succession guidelines, including the cases in which the company is no longer family owned.

It is crucial for the protocol to be accepted by all those who become partners in the company. The ideal moment to do so is when there are no disputes between the parties and when the founder maintains enough leadership to generate consensus on the rules to be established.  Another convenient moment is when economic growth results in diversification or expansion of the purpose of the business (such as the creation of a new production line), or the entry of new agents, either investors from outside the family or new members of it (such as by marriage); and, lastly, in the event of disruptive situations, such as divorces or declarations of incapacity or illness. 

The essential mission of the protocol is to optimize the normative solutions to preserve, develop and transfer to the next generation mainly that they are trustees of the assets. Failing this, the important thing is that the company founder’s work continues even outside the family, thus favoring maximization as a functioning entity and the interests of third parties related to it, such as employees, suppliers and customers.

D.    Protocol Content 

The protocol is an instrument for the administration of companies in which corporate, economic, and family issues converge, including legal and functional factors. Its content, broadly speaking and for purely didactic purposes, can be classified as follows:

a)    Agreements that, for different reasons, are not legally enforceable, but have moral value, such as statements on the objectives of the company, its responsibility towards the community and its continuity/permanence over time,
b)    Legally enforceable agreements, which may in turn be divided into those specific to corporate and commercial law and those specific to family law.
    Among these agreements we’ve identified, by way of example, the following:
    (i) Newly married shareholders must have an agreement on the separation of assets regime.
    (ii) Partners commit themselves to granting wills consistent with the agreed transition     guidelines, always respecting the rules of public order, particularly in connection with the portion of their legitimate share.
    (iii) Specific requirements for access to the management of the company, such as belonging to a certain family, certain education/degree, election process and     designation of operating and directive authorities. 
    (iv) Regime of capital contributions, either directly or through reinvestment of profits, dividends distribution policy and fees of managers who are part     of the family group.
    (v) Competition prohibitions.
    (vi) Restrictions on the transfer of shares.

The protocol may then have a varied and broad scope, depending on the particularities of each company and family.

E.    Protocol as a Succession Instrument

In the context of generational change, and specifically in cases of succession proceedings, management problems may become exacerbated and other problems may arise, such as the different situations of the new shareholders and the financial limitations that may be faced by those who wish to purchase shares from the rest of the shareholders. It is common that successors who have previously participated in the management of the company wish to remain in those positions and lack sufficient enough funds to acquire share ownership from their co-heirs. In turn, an heir who acquires a minority interest and does not participate in the management of the company will either want to be able to sell his/her interest at an adequate value or to participate in  management, often without sufficient knowledge and experience, thus affecting the course of business.

The inheritance aspect is also particularly relevant considering a potential tax that could be levied both on inheritance and free transfer by donation (which, up to date, applies in the Buenos Aires Province). The protocol could generate an adequate contractual framework to carry out the generational replacement process in anticipation of regulatory changes and new taxes that could make it more onerous in the future. Thus, it is possible to contemplate a donation of the shares of the family business to the members of the new generation, with the founding group retaining the usufruct of the shares, including their political and economic rights.

F.    Legal Reception. Validity

Resolution 19/2021 of the IGJ commented herein definitively confirms the validity of the family protocol, allowing third parties to know its existence and scope.

Until the enactment of the Argentine Civil and Commercial Code, the validity of a protocol could be questioned based on the absolute prohibition established by Section 1175 of the former Civil Code to enter into agreements for the purpose of a future inheritance. As a result of this prohibition, the protocols had to be limited to regulate aspects of the administration of a business, similarly to a shareholders' agreement (which, by the way, were and are not yet expressly regulated).

The Argentine Civil and Commercial Code introduced a material change in connection with the validity of the protocols by admitting them as an exception to the principle previously enshrined in Section 1175, expressly contemplating in Section 1010 such agreements (as long as they do not affect the legitimate inheritance or affect the rights of the spouse and third parties).

Its relevance was also established when regulating the forced indivision that the testator can impose (arts. 2330 and subsequent). This indivision was previously limited to cases of Law No. 14,394 for certain types of establishments. This rule provides that the testator may impose the indivision for a term of up to 10 years in the case of companies that constitute an economic unit, preventing the division resulting from the succession to affect the total value of the company or its continuity as such.

The Argentine Civil and Commercial Code included a new chapter on partition by donation (Sections 2415 to 2420). This alternative allows the business owner to donate his/her assets during his/her lifetime to his/her descendants, establishing from the very moment of the donation how they are distributed. It is common that these donations are combined with a dismemberment of the domain, where the ascendant retains the usufruct for life of the transferred assets (in the case of shares, the businessperson would then retain the economic and political rights derived from the donated shares). 

This donation is obviously subject to the action of reduction of those descendants who are not benefited and whose legitimate portion is not affected.