How to deal with disputes in the family business?

How to deal with disputes in the family business?

Sound Management and the Family Business

A Family business is the pillar of family assets. A special attention should be given to it in a Family Charter. Who manages the Family Business? Family members and/or others? They may be assisted by consultants and advisers. How are Family directors and officers appointed? Are they remunerated? If yes, what is their legal status? Are they employees of the Family? How to remunerate them? The Family Charter should provide answers to these questions.

An intricate matter not to be ignored when drafting a Family Charter, is to clarify and set out the management roles of Family members and of non-Family members. Who will manage the Family Business? A Family member? An outsider? What are the prerequites for a Family member to sit on the Board of the Family Business? Are young Family members admitted to play a part in the management of the Family Business? On what conditions? How are the Family Business managers and/or directors remunerated? How to evaluate their performance? How are shares in the Family business transferred?

The easiest way to approach these matters is to assimilate the Family to a legal or a corporate entity, having its own existence and interests independently of its members. The reason for this approach is to set a tested framework for the purpose of managing the Family and its assets in the most professional and businesslike manner. Ultimately, the Family members shall benefit from such an overall unbiased management. Consequently, and as a result of such simulation, a Family may have a number of bodies to manage it. The Family Charter shall provide for a structure which may comprise of the following bodies:

  • A Family Assembly: It comprises of all direct Family members. Its operation and decision-making process follow the pattern of a general meeting of a company.
  • A Family Board: This board is the executive management arm of the Family. It runs its affairs. Its members are appointed by the Family Assembly from amongst Family members or non-Family members. As a matter of fact, the independent executive Board members play a crucial role within the Board, as their input and contribution are made without any outside influence or pressure.
  • A Family Council: It is the body that comprises of Family members elected by the Family Assembly. In families, with a large number of members, it is more practical and more efficient to have a Family Council. In its capacity as the Family’s representative, this Council deals with Family matters on behalf of all Family members. The Family Charter shall set out the role and powers of the Family Council. Its most important role is to inter-act between the Family Assembly and the Family Board.
  • Family Committees: These are specialized committees comprised of the Family members who share common interests. Relevant matters of concern to the Family may be submitted to them for perusal and issuance of related recommendations.
  • Family Office: This appointed body runs the Family day-to-day affairs. It implements the Family Board decisions. Typically, it consists of administrators, legal counsels and fund managers. Family Office executives are recruited on the basis of their education, skills and experience. Their main task is to tend to the needs of the Family and its members in all respects. Family Office services range from concierge services to the provision of highly technical financial and legal advices and opinions, which cover current or contemplated investments of the Family.

Mismanagement

A family business, just like any other business, is exposed to the mishandling of its affairs, and the mismanagement by those who have been entrusted with the same. Such mismanagement may materialize in a number of ways, and may be attributable to a number of factors: a Family officer acting intentionally, or negligently, or simply omitting to act when his/her action is required; or to the lack of skills required for the job.

The easiest way to assess the performance of a Family business directors, officers and executives (hereinafter “a Manager” or “Managers” as the context dilates), is to assimilate such business to a corporate business. The duties, in particular the fiduciary duties, laid upon a Manager are no different than those laid upon their counterparts in corporate concerns. Governance, in its widest sense, is equally required in Family businesses.

Family Office Managers are similarly bound by the duties of care and loyalty. Their fair dealings, on behalf of the Family, is not a virtue, but a genuine duty. They should exercise generally recognized best practices, in good faith, using sound business judgement at all times. The fact that a Family Office Manager is at the same time a Family member, elected, or designated, to assume a managerial function, does not exonerate him of such duties.

  • Liability and Accountability: We are inclined to consider a Family member, who is in charge of managing a Family business, more at fault when violating governing regulations, in-house or otherwise, such as laws and official directives, than if “strangers” to the Family perpetrate the same wrongful act. The blood and “next-of-kin” bond with those the wealth of whom have been put in a Manager’s hands, creates, somehow, a type of a personal charge that does not exist in concerns managed by people who do not have such relationship. As we know, a court of law, looking into a matter brought to its attention, may very well award damages to the Family resulting from the misperformance of a Manager. In the event of criminal wrongdoings, such member may, in addition to the payment of a monetary fine, be sentenced to confinement in jail.
  • Disputes with a Managing Family Member: Is a dispute that arises between a Family member, who holds an executive function in the Family Office, or in any other concern owned or controlled by the Family, and the managed entity considered a Family dispute? There are two possible ways to look at this intricate matter, which occurs quite frequently in Families, let alone in Family businesses. If we consider the dispute as a Family dispute, in some cases, other Family members may take sides and support the Manager whose performance is being questioned, against other Family members who challenge such performance. Some of these disputes end up creating cleavages among Family members, and may result in deadlocks that are detrimental to the Family business and could threaten its continuity. The more reasonable approach could be to consider the dispute as being simply a professional dispute; the route cause behind it should be assessed in an objective way, as if the Manager in question was a total stranger to the Family. A common wrongful act by Family Office executives, who are members of the Family, is what we refer to in corporate law as “self-dealing”. This type of dealing consists of the Manager causing the Family business to transact with a related party, thus creating a conflict between the interest of the Family and the personal interest of the Manager. A typical illustration of this conflict is when a Manager reaps financial, or reputational benefits, on the account of the Family business and, consequently, the Family members.

Family Finances

The Family Charter provides also for the management of Family funds, as well as for the rules governing their spending and distribution. The Family Board sets the strategies for the achievement of the Family financial objectives within guidelines normally set by the Family. It also provides for the regular financial reporting to g members (annual, quarterly, monthly). This reporting helps keep all Family members abreast of the performance of Family liquid and non-liquid assets and help them plan their own individual finances and investments.

Settlement of Family Disputes

Disputes among Family members are inevitable, especially when they share the ownership, and/or participate in the management, of a Family business. A well thought Charter addresses all possible controversial issues that may arise within the Family and is, in this respect, a mitigator of Family disputes, and a reducer of their frequency. It helps settle such disputes to a large extent. These disputes normally arise as a result of unclear situations. All members of a Family may not agree on the way profits realized by the Family are to be disposed of.

A Family Charter usually addresses financial matters, such as the acquisition and preservation of valuable assets, the maximization of the return of such assets. If the management and disposal of these assets are regulated, the occurrence of disputes over them is automatically reduced. Having said that, neither a Family Charter nor any other type of documents may prevent or help avoid acute Family disputes.

It is only the will and determination of at least one, or one clan, or one branch of the Family members who are in dispute, that are likely to minimize the adverse consequences of the non-settlement of the disputes, not only between or among them, but mainly on the Family as a whole. This may require concessions to be made. These concessions will prove to be precious gifts to the Family.

The Charter sets out a whole procedure for the settlement of the Family disputes: how to initiate the process? Who, or which body, to submit the disputes to? Arbitration by an arbitration panel? Private arbitration? Or, in a worst case, litigation before a specific court? https://lb.linkedin.com/in/saba-zreik-13122a18

family business

Saba Zreik

Manal Consultancy

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How is a Family Charter drafted?

How is a Family Charter drafted?

Drafting a Family Charter

The drafting of a Family Charter is not a difficult task, as long as its author is fully aware of what to provide in it.

The best Family Charters are those that the largest number possible of Family members contributes to. Participating in the drafting of a Family Charter, or contributing to its contents, is an important step that is indicative that the participant, or contributor and, of course, all Family members who sign it off have the intention to abide by its provisions.

The Charter is the baby of those who bring it to life. They will cherish it. The best way to tackle this task is to select, from the items addressed in the above sections, and other items that are of relevance or concern to the Family, those to be dealt with in the Charter.

The first draft of the Charter shall consist of provisions to be submitted to the Family members and circulated to all of them, through the “head” of the Family, or its patriarch, or through any other member who launches this project, if a different person. The initiator shall preferably own the assignment to manage the whole process, unless another person is found to be more appropriate to assume this task.

Once all comments are received, a second draft may be generated and circulated, in anticipation of a meeting to which the largest possible number of Family members will be invited to attend, in order to sign off the execution copy of the Charter; if there is no final agreement, many subsequent drafts may be required in order to reach a real consensus.

All discussion sessions are supposed to be open ones; each attending Family member being allowed to bring in new ideas and raise issues, opinions, concerns etc. The person leading the discussions about the Charter should always keep the participants in focus and aligned, to the extent possible, with the interests of the Family in mind.

The main objective of the Charter is to set a roadmap, not only for the existing and participating, or even non-participating, Family members, but more importantly for the future of the Family and those of its future members who are not born yet.

Family members should be allowed and even encouraged, if they so wish, to seek outside professional advice on any particular matter to be dealt with in the Charter. While the size or length of a Charter does not necessarily suggest the weight that such Charter carries in terms of clarity, we believe that a great deal of details ought to be included in a Charter to make sure it is comprehensive enough and does address all concerns.

Amending a Family Charter

Family Charters are not set in stone and need to be looked at as living frameworks, to be updated, as and when appropriate. While they may stay with the Family for many years to come, a great number of the variables that they will have been drafted under or along are doomed to change over the years.

These relate to the evolution that the world and the Family, invariably and continuously, witnesses. These variables affect the regulations and laws, societies and social units with what it entails in repercussions on the Families and their businesses. Family Charters have to follow. This is why the drafting of the Family Charter ought to adopt great flexibility in order to avoid any deadlocks in their implementation or amendment.

Withdrawing from a Family Charter

There are various reasons for leaving the Family business. The most common one being the wish to be independent, using his/her share of the Family wealth to create and develop own business. There are other reasons such as disagreements with Family members, or with the way the Family Office is being managed, or the Family wealth invested

One other reason is the ipso facto retirement resulting from the death of a Family member and the unwillingness of his/her heirs to continue in the Family business, or to join the Family Charter, and this even if the latter does provide for such situations. The real question is, since getting out of a Family charter does not mean getting out of a Family, the conduct of which the Charter is supposed to govern, can a Charter be still enforced on the retiring member?

The simplest answers is that all provisions of the Charter, which are of a monetary nature, such as investment and divestment of Family funds and distribution of Family funds, should remain in full force and effect vis-à-vis the retiring Family member.

The only exception will be in the event, by mutual consent, or by application of the Charter itself or similar document/agreement to the same effect, the assets attributable to the retiring member are automatically liquidated. As for the non-monetary provisions, I do not believe that they can be enforced on the retiring Family member. In all events, it will be wise, if not already included in the Charter, to regulate a Family member’s retirement in an addendum to it. https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb

family business

Saba Zreik

Manal Consultancy

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Introduction to Basic Family Charters

Introduction to Basic Family Charters

Introduction to basic Family Charters

There are some frequent questions that are raised by researchers when looking into a specific matter. Some of them seem to have obvious answers when, more frequently than not, this is not the case.

What is a Family?

A Family is a group of individuals having in common a blood bond, or a kin relationship, derived from marriage or adoption. All civilizations across the globe have allocated a special place to family clusters or units. However, and for a number of reasons, not the least being the rather permissive mode of living in the West, children, after having attained the maturity age, leave their parental home and become, in a certain way, and to a certain extent, independent.

They participate in family gatherings every now and then, celebrate religious and other holidays together, just about what, and in some cases the bare minimum, that is required to keep their relationship with their parents and siblings.

Exceptions may be found in business dynasties, but the reason is mainly attributable to the need to preserve family wealth, by promoting closeness among its members, more than to the sense belonging to the Family per se. However, the meaning of a Family, in the Middle East for instance, has an extra moral dimension.

The larger a Family is, the strongest it is believed to be. This strength is consolidated by the fact that the children of the Family do not normally leave their parental home other than when they get wed; and once they do that, they keep returning home and inter-acting with the Family members on a very regular basis.

A Family is thus a social unit, consisting of parents and the children they raise. This is an obvious definition. However, in the business world we have seen extended families comprising of not only blood members. While in-laws admitted in the Family are not typically considered as Family members in the strict sense of the word, we have come across families where sons and daughters-in-law, or daughters and sons-in-law, have either been involved in the Family business or been given the opportunity of benefitting from such business, to an extent that justifies making them part of the business Family. Some other Families have expressly excluded non-blood Family members from the Family business and affairs.

What is a Family Charter?

Most Family businesses are governed by unwritten understandings, rules or tacit agreements governing their day-to-day running, their targets for the future, and how they anticipate the next generations will become involved.  However, just like any unwritten arrangements, these are likely to generate disputes and conflicts over ambiguous and unclear matters.

A Family Charter is a written statement of intent, or arrangement entered into by the Family members in relation, most of the time, to a Family business, other assets or Family matters in general. A Family Charter is also defined as the Family’s constitution, or protocol, handling the ownership, operation and disposal of the Family business and other assets. It is also a statement of agreed values, aims and relationships regarding the assets commonly owned by the Family members.

Who needs a Family Charter?

Families with no substantial wealth, let alone unwealthy families, do not really need to go through any lengthy procedures to ensure that the value of the assets they leave behind is preserved, protected and maximized as the years go by. However, the patriarchs of wealthy and high net worth Families do have a legitimate concern regarding the future of their business which they will have spent decades building, not only for them but also for their descendants.

Family Charters are mostly needed in families who have a substantial operating business. Not only members of the Family, who are directly involved in a Family business, need a Family Charter, but also, and maybe more importantly, those who are not involved. The latters feel more comfortable knowing that the Family wealth is being managed, with transparency, under proper governance and according to solid structures and principles.

Is the Family Charter Enforceable?

  • A Family Charter is unlikely to be a legally binding document. You may view it as more of a mission statement for a Family, or for a Family business with which Family Charters are frequently associated.  It may include, in addition to more easily assessable tangible provisions, a statement of values and ethical guidelines that are insufficiently precise to be enforced or, if violated, are not subject to any accountability. Having said that, and although a Family Charter is not, on the face of it, a perfectly legally binding document, it contains several provisions which reflect the consensus view of the Family stakeholders on specific matters. It should be viewed and assessed in the context of the overall framework of governance for the business, supporting the business plan drawn-up for the Family.
  • One way to ensure the enforceability of a Family Charter, and to convert what are moral obligations into legal duties, is to make the Charter as close as possible to a binding contract. If every Family member contributes to the Family Charter by attending the meetings held to discuss it, voicing their ideas and concerns, negotiating with other Family members, and agreeing with them on its terms. If all such members sign off on it, the Family Charter becomes a contract, and will thus be enforceable as such.  If rallying all Family members around a legally binding Charter is impossible, for whatever reason, then the most important provisions of the Charter may be embodied in one or more separate deeds, to be signed by all or some of the Family members. The notarization, or other types of authentication of the signatures, reinforces the enforceability of such deeds. Needless to add that only those of the Family members who will have signed the deed shall be bound by it.  https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb
family business

Saba Zreik

Manal Consultancy

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How to select your Multi-Family Office

How to select your Multi-Family Office

The constantly increasing number of wealthy families has, over the past years, had a strong effect on demand for wealth management services like Multi-Family Offices. Ever more wealthy business owners and families that have sold their businesses are considering a family office to support them with their wealth management, instead of standard wealth management services.

What is a Family Office?

A family office is normally set up as a privately-owned legal entity (or structure) and supports wealthy families with the management, organisation and maintenance of their global wealth. Although a family office can be used or established anywhere in the world, you will find them primarily in Europe (mainly in Switzerland, Monaco, Luxembourg and London) and the United States. Families can decide to set up their own single-family office (SFO), or make use of a multi-family office (MFO):

  • An SFO supports only one family, its legal structure is owned (or at least controlled) by that family and its services are made to measure to meet the needs of that family;
  • An MFO comes in all sizes, serving any number of families, ranging from only a couple to over a hundred. The legal structure is in most cases owned by the partners who manage the MFO, and it is also they who decide which services the MFO offers.

As an SFO is not economically feasible for most families, the majority of families end up opting for MFO services. Generally it can be said that for an SFO to be viable, family assets totalling at least $ 200,000,000 are required.

Recent trends for multi-family office services

As demand for MFO services increases, it could easily be concluded that the growth of the MFO industry is the automatic result of that; however, the supply side of this development should not be underestimated. Due to, amongst others, regulatory developments, the consolidation of the private banking industry, overall cost pressures on wealth managers and the “general hype” around MFO services over the last years, quite a few providers are entering or have already entered the MFO market with the aim of getting in on the action. So it is clearly not only demand but also supply that is feeding this trend.

While a large number of providers is generally considered a good thing in a free-market economy, given that this generates a variety of benefits – such as decreasing prices and a more competitive choice for consumers – the same does not automatically apply to the MFO industry.

What range of services is offered by a multi-family office?

There is no industry standard for what range of services an MFO should offer, and most MFOs tend to operate discreetly, off the high street, without giving an insight into their activities and what they actually offer clients. Moreover, the use of the term “family office” is, in almost all jurisdictions, neither regulated nor supervised, and even when it is, only lightly. Lastly, MFOs originate from very diverse backgrounds and tend to offer completely different ranges of services as a result.

Most MFOs only provide a small core of services in-house and coordinate a small number of other services on your behalf. Almost no family offices provide a very wide range of services. For these reasons, the MFO industry is very opaque, which is especially problematic for families looking to use MFO services. Or, as it is also sometimes put, “If you’ve seen one family office, you’ve only seen one family office”.

How to select your Multi-Family Office

It is therefore important for families who are considering using an MFO to compare providers carefully. An important starting point in this process is the origin of the MFO and its founders. Although this does not apply to all MFOs, the majority of them tend to focus on one or a limited number of services, which are closely related to the background of the founders. When the needs of the family are as closely related as possible to the main competencies of the MFO’s founders, the chances of a successful relationship are at its highest.

In this respect, several main types of providers can be defined:

  • Former wealth managers. This type of MFO focuses primarily on asset management, asset allocation, consolidated reporting, risk management and managing relationships with banks. These are often established by a small number of former bankers, and more recently there have even been smaller private banks repositioning themselves as MFOs.
  • Law firms/lawyers. Generally, these focus on estate planning, succession planning, family governance and a wide range of legal issues. Their services are often also related to the structure of the family business. Asset management is mostly outsourced, but monitoring of banks and provision of consolidated financial statements is regularly provided in-house.
  • Tax consultants/tax lawyers/accountancy firms. These focus on tax-efficient structuring, establishing and managing international structures for family businesses and real estate, international relocation, estate and succession planning, and audit and administration. Asset management is mostly outsourced, but monitoring of banks and provision of consolidated financial statements is mostly provided in-house.
  • Private banks or MFOs owned by private banks. These have a strong focus on asset allocation and asset management.
  • Trust providers/trustees. These focus primarily on setting up and administering structures such as trusts, foundations and holding companies, and providing audit and administrative services; some of these MFOs also focus on issues related to yachts and aircraft. Asset management is mostly outsourced, but the monitoring of banks and provision of consolidated financial statements is almost always provided in-house.
  • A Single-Family Office opening up for other clients. This is a difficult category to define, as the services offered are often closely related to the original needs of the founding family. Most of them have a focus on asset management, consolidated reporting and risk management, combined with a limited number of other activities, such as real-estate or private equity investments.
  • Others. The final small but broad category, which includes MFOs founded by real-estate or private equity experts, asset allocation experts, former investment bankers, or for example, by people with a focus on lifestyle management.

What questions to ask when selecting a multi-family office

As every wealthy family has distinct needs, families should carry out proper research on the providers they visit and ask the right questions to get the necessary insight into what they are offering. Otherwise, there is a significant chance that, further down the line, they will not be satisfied with the services their MFO of choice is providing them with. In another article we will deal with some of the practical questions that families should ask when searching for the right MFO. https://ch.linkedin.com/in/jan-van-bueren-0a522111

4 Steps on how to transfer the Family Business to next generations

4 Steps on how to transfer the Family Business to next generations

How to transfer the family business to next generations?

Timely and proper transferring of family assets requires careful planning and training of successors and documenting the rights and obligations of all family members. This should be based on discussions between qualifying family members in which each express their wishes, worries, objectives and ambitions regarding the family and its joint assets.

In this article 4 key steps are described which allow for a successful transfer of family owned assets to succeeding generations.

Step 1 – When to start the transfer process and who should be involved?

Experience shows that an early start with the inevitable transfer process substantially improves chances of a successful hand over to the next generation. The more involved members of the family are the better. It is essential that they take part on an equal footing and freely express their views. Some first key questions generally are: who is member of the family? Are in-laws –full- members? Are minors? And how about adopted children or those borne outside marriage? Once family- membership is agreed and clear, the next question is how to proceed and with whom?

Step 2 – Identify who wants to succeed and what training is required

Family-heads traditionally decide on their own who should succeed and when, rather than involving family members who can express their views and interests. The patriarch has the final say, but if he wants the transfer to go well and without future trouble, then advance truly open talks between family-members telling what they would want and expect, will certainly help.

For this involving an independent, experienced outsider can be the key. He should start by interviewing all eligible members. Then based on his findings he moderates discussions between family members to agree on the best successor(s). If there are more candidates then each should present their qualities and plans to the family deciding the best candidate. Thereafter a plan to train the potential successor should be adopted, while also the other members should be educated for their role as stakeholder.

But what if no one wants to succeed or has the capacity to do so? Then a non-family member will have to run the family business if it is not sold. To enable that to go well I recommend reading the articles dealing with family governance and family charters. Such documents should allow for outsiders to run the business adequately, while family members can enjoy (financial) rights and accept obligations and limitations.

These documents should also cover subsequent generations and possibilities for them to be(come) executive, and their necessary qualifications.

Step 3 – What rights and obligations should the successor and the other family members have?

Many family businesses fail after a transfer to the 2nd generation and most do not survive a transfer to the 3rd generation! This is because family businesses are generally started by entrepreneurial people who build their business on inspired plans and inspiration. At that stage there are few strict rules and limitations. Profits are applied for the business and with the business grow the experience and know-how of the creator. The founder is often convinced that his children are unable to succeed until they are quite old. A late transfer limits the chances of success!

When kids are finishing school, time has come to start the transfer process by first agreeing and laying down a clear, fair and transparent foundation for the future of the business (or other substantial joint property). Also the rights of all –agreed!- family members now and in future should be fixed, while the candidate-successor should start an intense training.

A committee of wise outsiders can both help to overview the training and protect the position of other future stakeholders as well as the business. So the process must start when the kids are relatively young. It must include discussions on and documenting of rights and obligations of all concerned allowing for a strong business that can be run without undue interference but with informed family members who receive a reasonable, pre-determined income from the joint property.

Step 4 – When should the transfer actually take place and how?

People do not live forever, but experience shows that owners of significant family assets can wait very long with handing over. Most of the time transfers take place upon the execution of a will, the contents of which are frequently a –bad- surprise to the family. Clearly earlier and pre-discussed documentation helps considerably and heads of families should not be afraid to open up on this. It is in fact their prime responsibility to ensure that both their business and his family are ready for the transfer of both the power and the legal title. Structures should be in place to separate power from the legal rights of all stakeholders (see a.o. articles on Foundations and (voting trusts).

There are ways for the older generation to make a transfer so that they can turn the wheel back if things do not work out as planned. However when that route is followed, the step to actually hand over should be taken when the younger generation can do so without undue interference from the elder, but with the possibility to benefit from their experience and knowledge. The new generation will do things differently but not necessarily badly. Also the family constitution should allow for some flexibility and adaptability.

Before the transfer takes place some organisation, committees or boards should be in place so that all members of the family are informed and have an agreed level of influence. Qualifying members of families should be on such boards probably together with 1 or more trusted outsiders who can protect all interests and help resolving potential differences of opinion by acting as mediator or arbitrator.

Fair treatment is essential

It is never easy to hand and to take over but good preparation, transparent documentation and fair treatment of all, is essential!
Most successful people find it increasingly difficult to let go and yet some day, they must! It is relatively easy if there is only 1 child, but when there are more, it is important to start the succession process soon. The successor must be identified and all concerned should be happy with the choice.

Establishing Training, Rules, Rights and Obligations

After that, the training should start while also discussing and establishing the rules, rights and obligations in the family. Such family documentation works best when it is based on broad family-wide discussions so that everyone feels contributor to what must be a fair piece. That will help the successor to run the business well while all others are getting the right information and their fair share out of the successfully transferred family business. https://www.nomoreworries.nl

family business

Philip van Hilten

No More Worries
+31 6 53 91 97 90
www.nomoreworries.nl
[email protected]