HAPPY BUSINESS FAMILIES
To ensure long term harmony between family members and sustainability of
the family business a trust structure is much needed to ensure that smooth
transition of business takes place within the family and problems of succession
planning are taken care of. An ideal trustee should be directly or indirectly
involved with the family business, management, and should have a clear idea on
what should be expected in relation to the ongoing management of the family
business. All of this is of course essential and one could argue the very basic
of what should be expected from a trustee when holding assets of this nature.
The poor administration of these assets can not only be detrimental to the bushiness’
reputation also its ability to continue and grow/ be competitive in the
industry hence it is extremely important for effective management of a
fiduciary relationship with the family.
Most trustees will acknowledge that when family- business shares are
held in a trust structure , the beneficiaries will have a greater emotional
attachment to the asset than if the trust were just a merely holding a
portfolio of marketable investments, or some other form of direct investments. The
trustee needs to have a far more proactive approach and great care in relation
to a family’s values, internal dynamics, culture and the assumed rights
regarding what is often the principal trust asset. A trustee who is unaware of
these factors can complicate their role when interacting with the beneficiaries
and administering the structure. It is not suggested that in any way the
beneficiary’s rights are in any way reduced or lesser if a different class of
asset is held – merely that the deep emotional connection to a family business
will require a trustee to be more aware and proactive when the managing the
ongoing relationship with the beneficial class.
Managing a Trust Structure:
It can be argued that the trust industry has evolved at a great peace in
the recent years which have resulted in a number of changes and plain vanilla
trust structures have been replaced by more complex structure with the requirements
of the clients depending on the family understanding and jurisdiction under
which the family conducts its business. In emerging markets like India family
business is seen as an extension of personal wealth and the need to place the
share into a trust is often greater than in developed markets. When managing a
structure holding such a complex asset, it is important to properly understand
the settlor’s rationale for establishing the trust. Settlors often tend to
settle assets of this nature into trust for succession- planning reasons
(seeking to ensure that business is not broken up on their death); to maintain
and ensure confidentiality and security; for tax planning purposes and to provide
a degree of asset protection from political and economic volatility.
If a family’s wealth has been earned relatively recently, certain
challenges arise when settling the business shares into a trust. Such
challenges can at a basic level be split into three groups. The first two are relevant
during the settlor’s lifetime and the third will be relevant after the
settlor’s death.
ENSURE THE STRCUTURE IS CORRECTLY ESTABLISHED
The initial challenge is to make sure that the structure is correctly
established. The most effective way of doing this is to engage a qualified and experienced
finance as well as legal professionals to work alongside the family in order to
draft the relevant trust documentation. The trust deed should be drafted after
taking into account the high risk and challenging nature of the asset and the family’s
emotional and dynastic connection to it. The deeds may, if appropriate, contain
reversed – powers provisions in respect of the family business. Depending on
the family’s wealth and its level of comfort with gifting away its assets to a
professional trustee, a private trust may be more suitable structure to hold
the family business shares.
ESTABLISHING THE SETTLOR’S BOUNDARIES
The second group of challenges involves working with the settlor and
with advisors to establish the boundaries of what the settlor can no longer do
with an asset they previously owned and had absolute control over. A trustee
must also work to ensure that where ever possible there is a constructive
access to the second and may be even third generation of beneficiaries. A
trustee needs to manage the beneficiaries’ aspirations, as some may wish to be
involved in the family business and may have their own entrepreneurial ideas.
IMPLEMENTING A FAMILY CONSTITUTION
In addition to the family members, there will be other stakeholders in
the business with expectations in relation to its long-term stability, ongoing
management and future success. These will include the management team, the
employees, financial institutions and outside shareholders. Managing these
stake holders’ interest and expectations as regard the business is important in
order to avoid potential future conflicts.
Where possible, a family constitution should be implemented. This
provides the frame work upon which the family’s affairs, including its
business, will be governed. It is in effect, a statement of agreed values, aims
and relationships. It is best if the family’s constitution is agreed during the
patriarch or matriarch’s lifetime, with input of the younger generation. Although
not legally binding, it can set out how often family branches meet, what should
be discussed, how members of the family
will react to various situations , how benefit should be taken from business
, mechanisms by which conflict can be successfully managed and resolved and the
authority of the individual involved with the business.
Communication is key, and it is vitally important for a trustee to have frequent
and meaningful contact with the family. This mean regular interaction with both
the family and its advisors in order to understand the family’s dynamics,
importance it places on certain values and its investment strategy and
philosophy. A trustee needs to meet the younger family members to establish an enduring
relationship with them and to remind the family of the trustee’s role and
responsibilities in holding the family business. The ethos of the family and
strategy around the family business should be agreed, to avert future conflict.
Without doubt the third group of challenges will be compounded if the
first and the second are not duly considered and properly tackled. All too
frequently, the death of a patriarch or matriarch will result in conflict among
an impossible task for the family members to agree on any matter. If they are
in a conflict and often the only uniting factor may be a new-found dislike for
the trustee further emphasizing from the incumbent trustee’s perspective, the
need to agree matters when the settlor is alive and the family is operating
harmoniously.
THE NEXT GENERATION
In developing markets like India it is often seen that the second and third
generation of families wish to deviate from the patch set out for them by the
first generation. There is a growing desire either to spend family wealth with little
regard to earning additional wealth or be successful in their own right.
Increased globalization and international migration have resulted in a greater number
of families being exposed to western culture, which may be the catalyst for
younger family members feeling empowered to challenge what would have
previously been accepted. Often without just cause and at a greater emotional
and financial cost to the family, these beneficiaries have attacked family structures
that have been established with the very specific purpose of leaving an
enduring family legacy.
Before accepting such a complex asset into trust, and despite all the
challenges in legislation, regulation, and case law, a trustee must remember
that its underlying fiduciary responsibility has not changed and neither has
the business and reputational risk of incorrect administering a specific asset
or structure. Over time the number of variables that can weaken a structure
have only increased and with this in mind the trustees should have to
compensate for these changes. Trustees should now be positioned to migrate many
of the risk associated with holding family business shares as trust assets. The
risks that cannot be mitigated should be carefully managed not only through
processes and controls but also through education, careful planning and strong communication
and relationship management. Ideally, multiple generation of a family will work
together with their advisors and trustee to ensure ongoing family harmony and
the continuation of a dynastic structure holding a family legacy.
_ Farzan Ghadially
