In a family business two systems act on the same people at the same time, one commercial and one familial. While they agree, the difference between them is invisible. Legal arrangements are written for the day they stop agreeing.
"The good arrangement in a family business is written while everyone still agrees. Once the dispute has erupted, every document reads as an attempt to win it."
Adv. Ester Efrati · Head of the Family and Inheritance Department
A family business is one in which ownership, and often management as well, is concentrated in the hands of a single family. Israeli law contains no single comprehensive definition of the term, only specific arrangements that touch on it. Section 64A of the Income Tax Ordinance, for example, recognises a family company in which all shareholders are relatives of one another, and whose income is attributed to a representative taxpayer holding the largest right to profits.
The legal distinctiveness does not come from the definition. It comes from the overlap. The same people wear two hats at once, and each hat answers to a different set of rules.
From that overlap follows the practical conclusion that recurs in every file: a family event is also a corporate event. Marriage, divorce, death or loss of capacity of a shareholder changes the ownership map of the company, even when nobody involved intended it.
Disputes in family businesses are less varied than they appear. They repeat, and most of them arise from what was left unregulated during the period when everyone still agreed.
They share one common denominator. The arrangement is postponed because it looks unnecessary while relations are good, and it is needed precisely at the moment when it can no longer be drafted calmly.
A family charter is a document in which family members set out the rules governing their relations around the business. It is not a statutory instrument, and no statute defines it or fixes its force. Its legal weight depends on whether it was drafted as a guiding statement of values or as an agreement the parties intended to bind them.
For that reason it is usually built in two layers, each doing different work.
The questions a charter has to answer recur: who may hold shares, who may work in the business and on what terms, how a family member's salary is set, what the dividend policy is, how directors are appointed, and what happens when a family member asks to leave.
A charter that remains purely at the values layer is not worthless, but it should be presented for what it is. It supports the family conversation; it does not create a right that can be sued upon.
The binding layer sits in two documents: the company articles and an agreement between the shareholders. Section 17(a) of the Companies Law, 1999 provides that the articles have the force of a contract between the company and its shareholders, and among the shareholders themselves. What is written in the articles is therefore not a statement of intent but an undertaking that can be enforced.
Section 20 of the Law governs amendment of the articles. Among other things it provides that where the company shares are divided into classes, no amendment prejudicing the rights of a class may be made without the approval of a meeting of that class, unless the articles provide otherwise. That is the legal tool that allows a family arrangement to be entrenched against a passing majority.
Four mechanisms recur in family business arrangements:
Where no such arrangement exists, the dispute reaches court as a claim of oppression. Section 191(a) of the Companies Law provides that where the affairs of a company have been conducted in a manner that oppresses its shareholders, the court may give directions to remove or prevent the oppression, including a direction that the shareholders or the company purchase shares. The remedy exists and is used, but it is applied after the damage has been done.
The question that generates the greatest anxiety in family businesses is what happens to the shares if a family member divorces. The Spouses (Property Relations) Law, 1973 establishes a resource balancing arrangement that applies on dissolution of the marriage. Under it, assets a spouse held before the marriage, and assets received during it by gift or inheritance, are excluded from the balancing.
That exclusion is a starting point, not immunity. The case law recognises that specific sharing in an excluded asset may be proved where the conduct of the spouses over the years shows an intention to share it. In addition, section 8 of the Law empowers the court to depart from an equal division in special circumstances.
Three arrangements narrow the exposure:
One point should be stated plainly: no arrangement guarantees an outcome. What a good arrangement does is narrow the zone of uncertainty and move the argument from what was agreed to how what was written is applied.
Handing over the reins is the decision that determines whether the business will continue to exist as a family business. It is a process rather than a single event, and most failures in it stem from its being postponed until circumstances forced it.
Three models recur in practice, each with its own logic:
Alongside the model, tax has to be addressed. Section 62 of the Land Taxation (Appreciation and Acquisition) Law, 1963 provides an exemption from appreciation tax on a transfer of a right in land without consideration to a relative. The definition of relative covers a spouse, parent, grandparent and descendants, while a sibling is included only where the right was received from a parent or grandparent, by inheritance or as a gift. The exemption does not extend to acquisition tax, which is charged at a reduced rate. Share transfers are governed by different tax rules and are examined separately and in advance.
For the three models in detail see intergenerational transition in a family business.
Two events stop a family business in its tracks: a state in which the controlling shareholder is no longer capable of taking decisions, and death. In both, the question is not who will ultimately inherit, but who is authorised to sign and decide the following morning.
For the interim period between death and actual distribution, an estate administrator may be appointed to hold and manage the estate assets. In an operating business that is sometimes the difference between continuity and paralysis. See probate and succession orders and estate planning.
A dispute in a family business does not stay within the business. It travels to the holiday table and comes back to the boardroom. The arrangement therefore has to set out not only what is permitted and what is not, but also how a dispute is resolved once it exists.
The central tool is mediation. Section 79C of the Courts Law [Consolidated Version], 1984 governs the referral of a matter to mediation and provides that what is said in the course of mediation shall not serve as evidence in civil proceedings. That protection is what allows family members to say in the mediation room what they will not say in a courtroom.
A good arrangement builds a ladder, so that not every disagreement reaches the courts:
Fixing the mechanism in advance matters more than its details. Once a dispute has erupted, agreeing on the identity of the mediator becomes a further dispute. See mediation in a family business and request for dispute resolution.
A family business rests on trust, and a legal arrangement does not replace it. It exists so that trust is not tested at the hardest possible moment, when a central figure is no longer present or a personal event has redrawn the ownership map.
A family business calls for company law, family law, succession law and taxation to be handled together, each of them affecting the others. The arrangement is therefore built as a whole rather than as a collection of separate documents.
If you own a family business, or belong to its next generation, contact us for an initial assessment. We will review the existing structure, the documents already in your hands and the gaps, and set out the options available to you.
These answers are general and do not replace advice on your own file.
Before drafting, it is worth establishing what the company documents already contain, what is missing, and which family events could redraw the ownership map. An initial consultation meeting does exactly that.
