Feelings Keep People; Rules Let Them Go

Why does one family lose wave after wave of people and hand the business down steadier each time, while another loses a single person and tears the whole business in two? The answer sounds as if it should be feeling. Yet the warmer a family’s feeling, the less it dares to lay the words “part ways” on the table, and when someone truly wants to leave, nothing is prepared. Feelings keep people. Rules let them go.

In southern Germany there is a small town called Herzogenaurach. The river Aurach cuts it into two banks: on one bank people wear Adidas, on the other they wear Puma. The two sides rarely marry each other; each drinks in its own taverns and buys bread from its own bakeries. The townspeople formed a habit: before striking up a conversation with a stranger, glance down first at the shoes on the stranger’s feet, then decide whether to speak. For this the town earned a nickname, the town that looks down at your shoes.

The two companies came out of one workshop and one pair of brothers. In 1924 the Dassler brothers founded a sports-shoe factory here, the elder, Rudolf, running sales, the younger, Adolf, running the technical side. In 1929 the two signed a partnership agreement that divided the profits and fixed the division of labor, all of it written out clearly. But it left three things unwritten: who had the final say, whether wives could put a hand into the business, and how, if they fell out, the brothers might part with decency.

What came knocking later was everything the agreement had not written. The brothers’ wives could not get along. A sentence was misheard in a wartime air-raid shelter. Each brother testified against the other in the denazification hearings. In 1948 the two divided the house: buildings, machines and patents were split item by item; the sales staff followed the elder brother, the technicians stayed with the younger; even their mother and their sister each took a side. The small factory the elder brother took away was later called Puma.

The territory was divided. Not a single rule was ever laid down.

A house with no door

In 1967 the Gucci family carried out one clean internal buy-back. Vasco, one of the three brothers, died without children, and his third of the shares passed to his widow. Aldo and Rodolfo together bought the shares out of her hands, half and half, and not a share left the family.

That time, the shares leaving belonged to a dead man; once the money was paid, the matter was closed. In the next generation, the one who wanted out was alive.

Paolo Gucci, Aldo’s second son, held more real power than anyone else in the third generation. In 1980 he wanted to build a brand of his own. His father threw him out of management and put out the word besides: any supplier that dared work with Paolo would be cut off. Paolo could not leave and could not stay. Left in his hands was three point three percent of the shares. Driven from the door, he filed one suit after another against his own family.

That three point three percent later became the lever that pried the whole family loose. Around 1984 his cousin Maurizio came calling. Rodolfo had died the year before, and Maurizio had inherited his father’s half of the company; all he lacked was the sliver that would carry him past half. He paid twenty million dollars for Paolo’s shares, one condition being that Paolo withdraw every lawsuit against the family. With the votes assembled, Maurizio drove his uncle Aldo from power.

The rest followed step by step. In 1989 Aldo sold his remaining sixteen percent or so, at a low price, to the investment firm Investcorp. In 1993 Maurizio, buried in debt, was forced out by the same firm; he surrendered the chairmanship and sold every share he held. A family business seventy-two years old, and from that year on, not one share was left in the hands of anyone named Gucci.

Back in Herzogenaurach, the exits were uglier still. Puma had been dragged into the red by an endorsement contract signed at a ruinous price; Rudolf’s two sons poured sixty-two million deutsche marks of personal loans into the company and could not fill the hole. In September 1987 the creditors spoke. A man from Deutsche Bank told the elder son, Armin: “You have lost your company.” In 1989 the bank, now making the decisions, sold off the Dassler family’s seventy-two percent of Puma, and what the family’s heirs finally divided among themselves came to a little over twenty million marks. Eighteen years later Puma changed hands again, at a valuation of nearly seven point one billion dollars.

On the Adidas side, Adolf’s son Horst had moved his four sisters out of day-to-day management with a rich gift of equity to each. In 1987 he died without warning. Forty-eight hours later the sisters stood at his children’s door, pressing them to sign the inheritance papers. In 1990 the sisters, desperate to be rid of the company, sold eighty percent of it to the French businessman Bernard Tapie. Tapie’s purchase money was bank loans from first to last, and the price, four hundred and forty million marks, was half of what the outside world reckoned the company worth. On the day of signing, the sisters raised one last request, and it had nothing to do with the price: they wanted it confirmed that they could still buy Adidas shoes at the company store with the staff discount, twenty percent off.

The middleman could not believe his ears.

Two price tags

The problem of exit is one that Lee Kum Kee, the oyster-sauce family of Hong Kong, has faced twice, and both times it forced the answer through with money.

The first time came around 1972. Lee Man Tat, of the third generation, wanted to push the oyster-sauce business forward; several of his uncles wanted to keep things as they were. Talk failed, and money ended it: Lee Man Tat and his father, Lee Shiu Nan, together paid some four million six hundred thousand Hong Kong dollars and bought out the shares in the uncles’ hands.

The second time came around 1986. The younger brother, Lee Man Lok, had learned some years earlier that he had nasopharyngeal cancer, and as his health sank, his wife began to plan for what would come after: better to cash out early than to leave the family’s fortune bound up in a company where her husband’s elder brother had the final word. At one point the brothers went to court. To raise the buy-out money, Lee Man Tat mortgaged the factory at Wong Chuk Hang and borrowed in every direction, pushing himself to the edge of bankruptcy, and in the end paid about eighty million Hong Kong dollars for the roughly forty percent of the shares his brother held.

The money was paid in full. After the buy-out the two brothers never dealt with each other again. Their father, Lee Shiu Nan, died in 1988 without ever seeing his sons reconciled. Late in life, Lee Man Tat said in a speech: “My brother, over disagreements with me about the family business, cut off all contact with me. To this day it pains and grieves me.”

Two buy-outs, two price tags: four million six hundred thousand, then eighty million. The company grew more valuable by the year, and the price of a buy-out climbed with it. A third round, no matter whom it fell between, might be beyond anyone’s purse.

The third round nearly came. In the late 1990s, Lee Man Tat and his son Sammy Lee Wai-sum fell into disagreement. Uncles could be bought out; a brother could be bought out; a son could hardly be bought out of the family too. This time, father and son turned the thinking around: no more haggling over price at the brink; write the exit into the rules ahead of time. Around 2002, Lee Kum Kee set up a family council and drew up a family constitution, which provides, among other things, that only family members by blood may hold shares, and that a member who wants out has the shares bought back by the family under rules agreed in advance, never sold to outsiders. These provisions are known from Sammy Lee’s public accounts over the years; what makes them work in practice is the shareholders’ agreement and the articles of association that sit beneath the constitution. From then on, whoever wanted to leave could walk out unhurried, with money and with dignity, and did not have to scuttle the whole ship on the way.

In 2021 they added a shareholders’ committee, prying the two roles of family member and shareholder further apart.

The partners who leave on schedule

Pictet, the private bank of Geneva, has nailed the rules of exit down harder than anyone.

The bank was founded in 1805 and is owned to this day by its partners in common. The rules run like this: a partner must retire at the set age, usually sixty-five. At retirement the shares cannot be sold on the market to the highest bidder, and cannot be passed to children; they can only be sold back, at book value, to the sitting partners as a body. No market premium, and no exceptions. Even a direct descendant of the Pictet family cannot inherit a single share from his father.

The money for the exit comes from the next partner’s buying in. New partners are chosen by the sitting partners together; they borrow to buy their stakes and repay slowly out of the dividends to come. The old generation’s exit money is the new generation’s price of admission. There is a companion rule as well: father and son may not be partners at the same time, and neither may brothers; candidates from within the family are assessed by the partners who are not family.

In two hundred and twenty years the bank has had forty-seven managing partners in all, on average one new partner in something over four years. Of the seven partners today, only two carry the name Pictet.

A harsher version was written into a will in 1812. Old Mayer Rothschild, on his deathbed, “sold” his entire share of the business and his property to his five sons at the depressed price of a hundred and ninety thousand gulden, and the will set down two hard rules besides: a partner who wanted the courts to settle an internal quarrel had to pay a fine before he could file; and whoever meant to break away could take only the minimum share the law allowed, reckoned on that depressed base of a hundred and ninety thousand, minus every gift he had ever received. Half a century later, the head of the Naples branch left the stage along with the old dynasty he had served. His cousins bought him out, the branch was wound up, and the man departed with his money and his dignity and settled in Geneva. He was the first partner in the family’s history to be bought out.

Dignity is a clause too

The item most easily left out of an exit arrangement is not the money.

Lee Byung-chul died in 1987, and the Samsung group passed to his third son, Lee Kun-hee. The children passed over did not walk away with nothing: the eldest son’s line took CJ, the eldest daughter took Hansol, the fifth daughter took Shinsegae department store. The trunk of the enterprise was spared division, the satellite groups each set off down their own road, and today CJ and Shinsegae are giants of their industries. Judged on design alone, the split is hard to fault.

Yet in 2012 the eldest son, Lee Maeng-hee, took his brother to court all the same. In 2008, special prosecutors had turned up a block of shares the father had left under borrowed names, and he wanted his portion back, a claim of some four trillion won. The suit ran two years, and he lost at both trials. Since then, the anniversary of Lee Byung-chul’s death has been kept with two memorial rites. One father, incense in two places, at the same appointed hour. The division of the house handed out assets. It never handed out mingfen, the acknowledged name and standing.

Korea’s business dynasties also supply the opposite case. At LG, the Koo and Huh families were partners across two surnames for fifty-seven years; they divided the house in peace in 2005, and the Korean press called it “a beautiful breakup.”

Setting dignity down in black and white is what Hong Kong’s Cheng family did most recently. In September 2024, Adrian Cheng Chi-kong, of the family’s third generation, resigned as chief executive of New World Development. The statement was worded with restraint; in substance he was being forced off the stage. But the manner of the exit was designed. The group carved out K11, the brand-management business he had founded, and sold it for about two hundred million Hong Kong dollars to a private company under his name, signing a thirty-year trademark license alongside. The ownership held in the family trust did not move by a single share; he gave up the running of the business and took away the enterprise he had built with his own hands. In June 2025 he resigned his remaining directorships and left New World altogether.

How to write the exit clause

The pits these families stepped in, and the rules that held, come to five clauses when written out.

First, the exit channel must be built in advance, with the triggering events listed one by one. Wanting to leave is only one kind of exit. Voluntary departure, death, incapacity, divorce, bankruptcy, expulsion for cause: every one of them leaves the destination of the shares hanging, and every one should have its procedure written down beforehand. The rules of exit should be laid while no one wants to leave. The Dassler brothers’ partnership agreement of 1929 wrote out the profits and the division of labor but not the procedure for parting, and by the time it was needed, no one could sit down to talk.

Second, set the pricing formula in writing before it is needed. The core of every exit dispute is the price, and a dispute over price can be dissolved only by a formula agreed in advance. Three paths are open: a fixed formula, such as book value or a multiple of profits; a periodic appraisal, refreshed each year and held in reserve; or an independent third-party valuation engaged when a dispute arises. Pictet chose the strictest, book value, and at the source the price lost all room for argument; the Rothschilds used a depressed valuation base to punish whoever broke away. A formula will not satisfy everyone. But when the formula exists before the conflict does, there is no price left to fight over.

Third, write down the order of buyers and the source of funds together. The customary order for taking up the shares runs: other family shareholders first, then the family holding vehicle, and last the company’s own buy-back. The money should be provisioned ahead of time: life insurance held against the event of death; a term of years and an interest rate agreed for paying a large buy-back in installments. The holding company of the Hermès family puts a third of its profit each year toward buying back the shares still in outside hands. Lee Kum Kee’s lesson lies exactly here: the buy-out of 1986 had no funding arranged in advance, and the buyer could only mortgage a factory on the spot and borrow wherever money could be found.

Fourth, put the clauses against outflow in place as a full set. Beyond the promise of buy-back, the papers must also state: the family’s right of first refusal before shares pass to anyone outside it; the limits on a departed member’s use of the company’s trade name, the family surname and the trademarks; and whatever non-compete and confidentiality duties are necessary. The Hermès lesson sits here: more than two hundred members held scattered stakes with no agreement to act in concert, and the open secondary market let an outsider quietly gather nearly twenty percent, then push past twenty once the cards were on the table; the family mended the fence only after the sheep were gone, locking more than half its shares away for twenty years. France’s Mulliez family goes further still: a thousand-odd family shareholders together own Auchan, Decathlon and a string of other companies; not one of the companies is listed; shares move only within the family and may not be sold outside it without the family’s collective consent. Keeping shares in the family cannot be trusted to feeling. The scattered rights to sell must be gathered into a single agreement.

Fifth, give the dignity clauses the same weight as the money clauses. Carry an exit arrangement to its end, and what remains is standing: the public account of the parting, drafted by both sides together; the positions the departing member keeps, an honorary directorship, a seat in the family assembly, written into the clauses; a formal occasion to mark the handover. Samsung’s division of the house gave assets in full measure and still ended in a lawsuit over some four trillion won. Where it lost was standing.

A closing thought

To judge whether a family’s ownership arrangements will hold, look at the door they leave for the one who wants to go: when he may leave, at what price, and whether, once he is gone, he is still family. Write those three things down clearly, and the one who leaves keeps his dignity, and the ones who stay keep their peace.

In the cemetery at Herzogenaurach, the graves of Rudolf and Adolf lie at opposite corners of the ground, diagonal from each other, the farthest apart that piece of land allows.

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Case sources: The Town That Looked at Shoes: Adidas, Puma, and the Unmaking of the House of Dassler; The Shadow of the Double G: The Rise and Ruin of the House of Gucci; A Bottle of Sauce and a Book of Law: Five Generations of Lee Kum Kee; The Night Watchmen of Geneva: How the Pictet Partnership Has Endured for 220 Years; The House of the Green Shield: Five Arrows and the Rothschild Lock; The Bow That Ended a Dynasty: Three Generations of Samsung; Chow Tai Fook’s Gold, New World’s Debt; The Saddle Stitch: Six Generations of Hermès and the War for Its Soul

Academic references

• Albert O. Hirschman (1970) Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Harvard University Press
• Craig E. Aronoff & John L. Ward (2011) Family Business Ownership: How to Be an Effective Shareholder, Palgrave Macmillan
• Ivan Lansberg (1999) Succeeding Generations: Realizing the Dream of Families in Business
• IMD Business School, The Mulliez Family Business: Unlocking the Secrets of Entrepreneurial DNA (A/B), case study