In 1919, in the aftermath of a world war, an American named George Merck stood at a United States government auction and bought back his own family's company. Two years earlier, the Alien Property Custodian had seized...
In 1919, in the aftermath of a world war, an American named George Merck stood at a United States government auction and bought back his own family's company. Two years earlier, the Alien Property Custodian had seized the shares that the German parent firm held in Merck & Co. of New Jersey under the Trading with the Enemy Act, because the Mercks of Darmstadt were, legally speaking, the enemy. With backing arranged through Goldman Sachs and Lehman Brothers, George paid roughly 3.5 million dollars and walked away with the American business, now permanently severed from the German family that had built it (Reference for Business; Wikipedia).
That auction is why there are two Mercks in the world today. The American one, Merck & Co., became one of the largest pharmaceutical companies on earth and owes the family in Darmstadt nothing. The German one, Merck KGaA, is still controlled by the descendants of a seventeenth-century pharmacist, who hold 70.3 percent of it through a private partnership that sits above the listed company like a keel under a hull (Wikipedia).
The German family calls the American episode a loss. It would be more accurate to call it tuition. Because everything the Darmstadt Mercks built afterward, the holding structure, the family councils, the deliberate refusal to ever again let outsiders touch the core, is a direct answer to the question that auction posed: what happens to a family business when the family's grip on it is an accident of circumstance rather than a designed system?
Begin where they begin. In 1668, a pharmacist named Friedrich Jacob Merck took over the Engel-Apotheke, the Angel Pharmacy, in the small Hessian town of Darmstadt (Wikipedia). For a century and a half the Mercks were what most family businesses are: competent local operators passing a shop from father to son.
The leap came in 1827, when Emanuel Merck, a descendant with a chemist's training and a merchant's nerve, began manufacturing alkaloids at industrial scale. Morphine, later quinine and codeine, produced with a purity that individual apothecaries could not match. The pharmacy became a factory. The factory became an exporter. By the late nineteenth century Merck was selling worldwide, and in 1891 the family sent Georg Merck to establish a subsidiary in the United States, the branch that would eventually become Merck & Co.
Notice what had happened by 1917, on the eve of the seizure. The family owned everything, but the ownership was informal in the deepest sense. It rested on the assumption that the world would keep permitting a German family to hold American assets, that family members would keep agreeing with each other, that the business and the family were simply the same thing and needed no membrane between them. The war tore that assumption apart in a single administrative act. The family did not lose the American company through bad management or a failed product. They lost it because their control was exposed, sitting directly on the operating asset, where any government, creditor, or feud could reach it.
Fast forward to the modern arrangement, because the modern arrangement is the lesson.
Merck KGaA, the company listed on the Frankfurt exchange since 1995, is a Kommanditgesellschaft auf Aktien, a partnership limited by shares. Public investors hold a minority of the share capital. The remaining 70.3 percent of the economic interest belongs to E. Merck oHG, a general partnership whose partners are members of the Merck family, and only members of the Merck family (Wikipedia).
Read that structure slowly, because most business owners have never seen its like. The family does not hold shares in the listed company the way you hold shares in an index fund, exposed and countable and sellable one by one. The family holds a partnership, and the partnership holds the company. E. Merck sits above Merck KGaA. The listed entity is downstream of the family agreement, not the other way around.
The consequences cascade. Under the KGaA form, the general partner carries responsibilities and powers that ordinary shareholders cannot vote away. A hostile acquirer could theoretically buy every publicly traded share of Merck KGaA and still not control the company, because control does not live in the traded shares. It lives one floor up, inside a private partnership with its own admission rules, and you cannot buy your way into a family (CMG Partners).
This is the inversion that the 1917 seizure taught. Before the war, the operating asset was the fortress and the family stood inside it. After, the family agreement became the fortress and the operating asset stood inside that. Capital markets can have access to the business. They can never have access to the family's control of the business.
A structure on paper is worthless if the humans inside it fracture, and by now the humans number in the hundreds. The Merck family today spans roughly thirteen generations, with over three hundred living members, of whom around 204 are family shareholders in the partnership (Family Business Magazine).
Two hundred four owners. Most family firms shatter at eight. The usual killer is not competition but arithmetic: each generation multiplies the owners, dilutes the attachment, and raises the odds that someone wants out, sues, or simply stops caring. The Mercks answered arithmetic with architecture. Family governance runs through distinct bodies with distinct jobs: a Partner Assembly of all family shareholders, a Family Board, a Board of Partners that functions somewhat like a supervisory board for the partnership, and the Executive Board of E. Merck (Family Business Magazine).
The design principle underneath the org chart is separation of temperaments. Day-to-day management of the listed company is largely in the hands of professional executives; family members do not get operating jobs as a birthright. What the family reserves for itself is ownership competence: the Board of Partners approves the big strategic questions, and the family invests seriously in educating each generation to be capable owners rather than capable managers. Young Mercks are trained in what the company does, how the structure works, and what is expected of a partner, long before they hold any power. The family treats ownership as a profession with its own curriculum.
And there are covenants with teeth. Partners commit capital for the long term, distributions are conservative, and profits are substantially retained in the business. The deal offered to each Merck is explicit: you will never be able to treat this as a liquid asset, and in exchange your grandchildren will still own it. People who want a different deal can exit on defined terms, inside the partnership, quietly, without ever putting control in play on a public market.
That is the second half of the mechanism. The holding structure keeps outsiders from buying control. The governance structure keeps insiders from selling it.
It matters that the Mercks did not design this in a seminar. They designed it downstream of a wound.
The loss of Merck & Co. is the founding trauma of the modern German company. The American firm they were forced to abandon grew into a giant that, for long stretches, dwarfed its former parent. To this day the two companies partition the name between them like a divorced couple partitioning friends: the Darmstadt firm may call itself Merck almost everywhere on earth but must trade as EMD in North America, while the American Merck & Co. operates as MSD outside the United States and Canada (Wikipedia). Every business card is a reminder.
Families that endure tend to treat their disasters this way, as curriculum rather than misfortune. The seizure taught the Mercks that ownership which merely exists can be taken, and only ownership which is engineered can be defended. When the company finally went public in 1995, after 327 years of private ownership, the family did not simply float shares and hope. They floated shares beneath a structure that had spent decades hardening, so that the listing raised capital without transferring a gram of control. The public got economics. The family kept the company.
Compare that sequencing to how most owners meet the capital markets. The typical founder lists the business first and discovers the governance problem later, at the first activist letter or the first sibling dispute over sellable shares. The Mercks ran the order in reverse: agreement first, structure second, listing last. By the time any outsider could buy a piece of Merck, the piece that mattered was no longer for sale.
You do not own a 357-year-old pharmaceutical company. The principle still transfers, because the principle is not about size. It is about sequence and placement: put the family agreement above the operating asset, not beside it, and never beneath it.
In practice, at almost any scale, that looks like three moves.
First, create the layer. A family holding company, a trust, a partnership, whatever vehicle your jurisdiction makes cheap and durable, that owns the operating business and is itself owned only by family under rules the family writes. The operating company can then raise money, take partners, even list, without those events ever touching the ownership layer. When opportunity or catastrophe arrives at the operating level, and both will, the question of who controls the family's stake has already been answered somewhere the event cannot reach.
Second, write the covenant before you need it. The Merck partnership works because the terms of belonging were settled in calm weather: how a family member becomes a partner, how one exits, what gets distributed and what stays in, who speaks for the ownership and how they are chosen. A one-page family agreement drafted this year, while everyone still likes each other, outperforms a brilliant one drafted mid-crisis, because the mid-crisis version never gets signed.
Third, train owners, not just heirs. The Mercks' quiet genius is the 204 shareholders who understand what they hold. Most estates transfer assets to people who were never taught what the assets are for, and the assets scatter within a generation. An hour a month walking your children through the business's numbers, the holding's rules, and the reasons behind both will do more for continuity than any clause a lawyer can draft.
There is a version of the Merck story that reads as a paradox: the family that lost a company to force learned to keep one against everything else. The paradox dissolves once you see what they actually protected. They did not protect the business from change. The business changed constantly, from pharmacy to alkaloid factory to a global group spanning healthcare, life science, and electronics. They did not protect it from outside capital; the Frankfurt listing invited outside capital in. What they protected, with a structure above the structure, was the one thing that converts a company into a legacy: the family's undivided, unpurchasable, internally governed control.
So take the decision this story has been walking toward. Whatever your scale, whether the asset is a factory, a farm, three rental units, or a software firm, put the family agreement above the operating asset. Draw the two boxes on a sheet of paper tonight, the family vehicle on top, the business below it, an arrow of ownership running down. Then ask what currently sits in the top box. For most families the honest answer is: nothing. The business sits alone, exposed the way Merck's American subsidiary was exposed in 1917, waiting for a war, a lawsuit, a death, or a divorce to demonstrate the difference between owning something and having merely not lost it yet.
The Mercks needed a confiscation to learn the difference. The tuition has already been paid. You are free to copy the answer.