Instruments to promote good corporate governance in family businesses in Uruguay

In Uruguay, it is estimated that more than 80% of companies are family-owned. However, this statistic has a well-known flip side: only 15% of family businesses reach the third generation. Failure is rarely explained by operational management errors, but rather by the lack of clear rules that separate—without disconnecting—the family realm from the business realm.

Managing well is not always enough

Usually, the effort to professionalize a family business concentrates on the daily administration and management of the company. Appointing independent directors, setting up committees, drafting internal regulations, implementing financial controls, and conducting external audits are all necessary steps, but they only resolve part of the problem. Experience shows that the most frequent source of conflict lies not just in how the company is managed, but in how the relationship between family shareholders is governed—especially at the time of the founder's succession.

In this regard, it is advisable to define clear criteria regarding family members' participation in the company, how profits are distributed, who decides relevant, structural, or long-term matters (and how), and what to do when a family partner wants to sell their stake and exit the company.

There is no single formula

Good corporate and family governance guidelines agree that there is no single instrument or mandatory order to professionalize the governance of a family business. There is a set of legal tools that each business-family combines according to its stage, the number of shareholders, the degree of consensus achieved, and what it actually needs to organize. In Uruguay, three tools fulfill distinct functions, and it is often best to use them in combination.

1. The shareholders' agreement

Expressly recognized and regulated in Commercial Companies Law No. 16.060, the shareholders' agreement legally binds its signatories and enables enforcement mechanisms in the event of a breach. The agreement can have any scope, limited only by legality (Art. 331), making it a true custom-tailored solution for each company. Notable terms that can—and should—be regulated in family businesses include:

• Dividend policy, setting minimum distribution percentages or objective criteria based on the financial situation of the company.

• Special majorities required to adopt relevant decisions, such as significant debt, mergers or sales of the company, entry of third parties into capital, or modifications to the corporate purpose.

• Conditions for family members to work in the company: minimum required education, prior experience in another organization, and/or evaluation processes equivalent to those for external candidates.

• Maximum number of family members from each branch who can hold managerial or executive positions.

• Rules for the valuation and transfer of shares among shareholders, including right of first refusal and applicable valuation methods.

• Dispute resolution mechanisms between shareholders.

• Composition of the governing body and conditions for incorporating subsequent generations into management or the board of directors.

The main limitation of the agreement as a governance and planning instrument is that it only binds existing shareholders. A family member who is not yet a shareholder (even if they intend to become one in the future) is not subject to the agreement and may disregard it when the time comes, potentially generating corporate and family conflicts.

2. The family protocol

The family protocol serves a different, yet significant function. It is the document in which the family establishes its vision, mission, and values regarding the company, training criteria for future generations, family communication policies, and generally everything that should be discussed and agreed upon even before those participating in the discussion become shareholders. It can also include the perspective of individuals without any expectation of becoming shareholders, such as spouses or in-laws working in the family business.

It is worth noting that since Article 1285 of the Uruguayan Civil Code prohibits agreements on future inheritance, the effectiveness of the protocol as a legal tool to bind non-shareholders regarding their inheritance is questionable. When the time comes, an heir could attempt to depart from the protocol by claiming it is not legally valid. However, this does not deprive the protocol of value. It retains full moral force and, in practice, serves as the foundation for both the shareholders' agreement and the wills of the founder or shareholders, which do carry full legal weight. Properly used, the protocol acts as a foundation and complement to the shareholders' agreement while regulating matters that the agreement cannot or should not address.

3. The management trust

A third instrument, less widespread but increasingly used, is the management trust regulated by Law No. 17.703. It consists of transferring company shares into an independent bankruptcy-remote asset pool (the trust) managed by a trustee according to instructions agreed upon by the family (typically those stemming from the protocol). Dividends are allocated to designated beneficiaries and can be flexibly distributed to current shareholders, future heirs, or third parties.

The utility of the trust is especially important during generational transitions, as it unifies voting rights under a single entity (the trustee), preventing share dilution among multiple heirs from complicating or paralyzing company governance. It also allows economic rights to be granted to future heirs without immediately handing over individual political control of the company.

Conclusion

The family protocol brings order to the family, promotes consensus, builds company culture, and enables future planning. The shareholders' agreement converts that consensus into enforceable commitments among existing shareholders, and succession can even be brought forward to secure these commitments for future generations. The management trust allows voting rights to be unified and anticipated during generational transitions.

Which one should be used? It depends on the history of each family business, its generational stage, and the consensus the family can actually reach.

Ultimately, the earlier family and business discussions are addressed—and their resulting agreements enshrined in these instruments—the lower the risk that potential family conflicts will spill over into the business and jeopardize its survival during succession