Contingency Planning In Family-Owned Businesses

Much has been discussed regarding the legal interdiction of former President Fernando Henrique Cardoso, aged 94, who is affected by advanced-stage Alzheimer’s disease. Among his three children, the eldest son, Paulo Henrique Cardoso, was appointed as interim guardian, with the agreement of his two siblings, as he had already been informally managing his father’s assets, as well as with the consent of the current spouse.

As reported in the media, interdiction — that is, the legal declaration of incapacity to perform civil acts — must be judicially determined upon request by interested parties, supported by a medical report, which must be confirmed by a court-appointed expert.

Once appointed by the court, the guardian becomes legally responsible for the civil acts of the ward, including the management of all assets, such as equity interests, real estate, and financial resources.

When this situation is applied to shareholders of family-owned businesses, incapacity — whether temporary or permanent — becomes more complex. The appointed guardian will represent the incapacitated partner in shareholders’ meetings, having access to all company information and deliberating on various matters, including the appointment of managers, approval of accounts, and new investments. The exception concerns the disposal of equity interests: the guardian may not sell or pledge the ward’s shares or quotas.

A similar temporary substitution occurs upon the death of a partner in a family business. Although it is understood that ownership interests will eventually be transferred to heirs — such as children — until the estate is formally distributed, the ownership remains tied to the estate, which is represented and managed by the appointed executor (inventariante).

In other words, upon the death of a partner, the executor will represent the estate in shareholders’ meetings, exercising the corresponding participation in corporate decisions.

In a recent article published in Valor Econômico, Mr. Antonio Carlos Pérpetuo, founder of Supera, a “cognitive stimulation educational network,” highlighted key recommendations commonly observed in succession planning for family businesses: (i) start early; (ii) maintain open dialogue; and (iii) preserve the identity and values of both the family and the business, reflected in corporate governance practices.

Therefore, when structuring succession planning for a family business, it is essential to align not only who will occupy ownership and management roles, but also who will act as guardian and executor during transitional periods, as these roles are integral to corporate governance.

Under current legislation, both in cases of civil incapacity and the appointment of an executor, the judge must observe a legal order of preference:

1. Spouse or partner;
2. In the absence of a spouse or partner, the parents;
3. In the absence of the above, the children, preferably the one already managing the assets;
4. A person of the judge’s trust.

This list is not exhaustive and may be set aside through the presentation of a public deed appointing a guardian and a will appointing an executor, as such instruments demonstrate the individual’s intent regarding the continuity of proper asset management and the trust placed in the designated person.

Regarding guardianship, Article 1,775-A of the Brazilian Civil Code allows for the appointment of more than one guardian for joint administration — for example, two guardians to represent the ward in the company, or one guardian for the business and another for other assets. The structure may be tailored to suit asset management needs.

In contrast, in estate administration, although an executor may be designated by will, there is no express legal provision for appointing more than one executor. Cases involving multiple executors are exceptional and typically arise from judicial decisions in highly contentious scenarios.

Alignment among family members and business partners on this matter is so relevant that many families include it in shareholders’ agreements to ensure greater predictability and legal certainty.

 After all, who should be engaged the day after an incapacity or death event? Will ongoing business operations be maintained by the guardian or executor? Does the legally preferred individual have the qualifications and capacity to participate in and deliberate at shareholders’ meetings?

The emblematic case of Anitta Harley, the largest shareholder of Casas Pernambucanas, illustrates the absence of contingency planning: she has been incapacitated and in a coma for over ten years, with frequent court-appointed changes of guardians, who indirectly represented her in the company.

Although Casas Pernambucanas is controlled through holding structures with robust corporate governance — including a board of directors, advisory board, committees, and executive management — ultimate decision-making authority rests with a single individual, subject to incapacity or death. Her unplanned incapacity effectively became a stress test for the existing governance structure.

In Fernando Henrique Cardoso’s case, although there was no formal record indicating a preferred guardian, the judge appointed his son Paulo Henrique based on a power of attorney previously granted by the father, combined with the agreement of the siblings and especially the current spouse. Otherwise, the spouse could have claimed priority in the appointment, as provided by law.

In contrast, the strong governance structure of Casas Pernambucanas helped mitigate the challenges arising from the lack of contingency planning by its principal individual shareholder.

These two cases reinforce the importance of contingency planning as part of succession planning and corporate governance — essential tools for protecting and ensuring the continuity of family businesses in scenarios that, even if temporary, may compromise management stability and the preservation of assets.