Important things to know when organising the Family Business

Important things to know when organising the Family Business

Organising the Family Business

Family reunions and family council

Transparency fosters trust. As former US Supreme Court Justice Louis D. Brandeis once noted, “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants ….”

This holds true for families as it is applicable to the sound management of large commercial companies. The place where this transparency can be achieved in families is the family reunion, a gathering of family members at regular intervals during which information is provided to the family members on the ongoing business, important events and future developments.

In particular if families are large and where the family decides to include spouses and children (of a certain age) to be admitted to the family reunion it makes sense to create from the family body a committee charged with the organization and running of the family reunions. The formation of such a committee – or family council – should be based on the family charter which should define its duties, exact composition and its decision-making powers and the requisite procedure.

In its function as the link between the business and the family, the family council has the duty to disseminate information about the business to the family members at the family reunions. The family council should draft an information policy regarding the development of the business. Holding family reunions and involving younger generations from a suitable age goes towards establishing a healthy understanding and identification of these persons with family business.

The family council is best made up of family members with a direct stake in the business or who are actively involved in the management of the business. Choosing a chairperson for the family council can be a challenging task.

The person should be someone that enjoys wide trust within the family and who has a large measure of experience in the family business and who can also communicate well with the various groups making up the family reunion. Since it is also the chairperson’s calling to promote compromise and facility consensus among the family members it is advisable not to appoint the CEO of the family business to this position. In many instances the CEO might lack the objective distance to the business necessary to achieve a healthy compromise.

Information and communication

In order to ensure positive relations within the family and the environment in which the family business operates (inner realm being the family and the outer realm being society at large), a sound and honest information policy should be devised and adhered to. Depending on the size of the family involved such communication may take the form of regular dinner table discussions or the distribution of updates in the form of family newsletters.

Both formal and informal communication should find their place. Discussing family relevant business issues at an early stage and with the necessary frankness are an important part of avoiding or diffusing differences of opinions and conflicts becoming insurmountable.

Taking into account that the perception of a family business by outsiders and the public at large has significant influence both on the reputation of the business but also on the loyalty of the family members to the business it is important to also develop a coherent and positive communication policy to the public. By communicating major decisions to the public, the family can increase its credibility and gain the trust of the general public and its customers.

At the same time the advantages of a positive communication policy need to be balanced against the need to keep confidential certain valid business interests, trade secrets and the will to safeguard the family’s privacy interests. Where no clear and well supported communication policy can be achieved internally, it is advisable to include an external chairperson or mediator in the process. https://www.prager-dreifuss.com/

These archived articles are written by authors no longer participating in the Family matters on line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

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Outbound investments from China

Outbound investments from China

For Chinese individuals making outbound investments, overcoming the obstacles from the aspects of regulatory and foreign exchange control becomes a priority.

As China is now the second largest economy in the world and produces millionaires and billionaires faster than any other country every year, going abroad and investing overseas has become increasingly attractive for Chinese individuals.

While many Chinese high net worth individuals are emigrating from China to other countries such as the US, Canada, the UK, Australia, and Singapore every year, and while the Chinese tourists are now the biggest customer group of luxury goods in Europe, investing overseas by Chinese individuals is still a mission impossible. For example, a Chinese individual cannot remit out cash of more than USD 50,000 a year even for buying a home. In addition to the difficulty in moving money offshore, investing overseas by Chinese individuals requires strict government approval, for which amazingly no clear rules have been issued so far.

Regulatory Approval Requirement for Outbound Investments

From a legal perspective, investment overseas by Chinese individuals mainly involves two big issues – the regulatory approval requirement and the foreign exchange control restriction.

In 2004, the National Development and Reform Commission (the “NDRC”) issued the “Interim Measures for the Administration of Verification and Approval of Overseas Investment Projects” (the “Measures”). The Measures primarily apply to Chinese enterprises. However, Article 26 of the Measures states that “with regard to the verification and approval of a project carried out by an individual or other organization, these Measures shall apply as the reference”.

With that, it seems that the examination and approval procedures for overseas investments by individuals shall be the same as that applicable to Chinese enterprises. However, in practice, this has not been tested so far and we are not aware of any case where a Chinese individual has successfully gone through such approval procedures.

Furthermore, after getting the NDRC approval, an investor needs to get one more round of approval from the Ministry of Commerce (the “MOC”). However, the “Measures for the Administration of Overseas Investment” issued in 2009 by the MOC only set out the specific approval procedures for Chinese enterprises, without any specific references to offshore investments by Chinese individuals. Following the common legal practice in China, no rules usually means not allowed. As a result, the MOC will simply not accept an application for approval for overseas investments by Chinese individuals.

Foreign Exchange Control

The foreign currency used for overseas investments by Chinese individuals is deemed as for capital use, which is currently under strict control. Although the existing foreign exchange control rules seem to allow that overall, there are no operating rules setting out whether and how individuals can apply to the relevant authorities for remitting out cash of more than USD 50,000 every year.

In practice, the foreign exchange authorities will simply use this as a reason for turning down such a request. The annual quota of USD 50,000 is stipulated in the “Administrative Measures for Personal Foreign Exchange”. As such, Chinese individuals often find it impossible to obtain the foreign exchange approval for overseas investments.

How to Get around Those Obstacles

Among many creative ways for getting around the legal obstacles mentioned above, the more straightforward way is for a Chinese individual to use a Chinese company as the investment vehicle. This is allowed although various government approval and registration procedures have to be followed. This structure may have a tradeoff from a Chinese tax perspective though, because it adds one more layer of Chinese tax.

For example, if an individual directly invests in a HK company and sells the HK company later on, the capital gains will be subject to a 20% Chinese individual income tax. If the individual invests in HK company through a Chinese company, the same capital gains will be first taxed at 25% at the Chinese company level and further taxed at 20% at the individual shareholder level (i.e. at an effective tax rate of 40%).

Another way is for a Chinese individual to form an offshore company in one of the traditional offshore financial centers such as the BVI, the Cayman Island and HK and use transfer pricing techniques to move cash from China to that offshore company. For example, the individual may arrange for a Chinese company he or she owns to export products to a HK related company at a relatively low price, which will then sell such products to a third party at a high price. This obviously creates a tax issue as transfer pricing between two related parties is always subject to scrutiny. However, many Chinese individuals tend to ignore such a risk.

A third way is to use a bank product that is called “security onshore and lending offshore” to get a loan overseas. A simple description of that product is that a Chinese individual will arrange for a Chinese company that he or she owns to place a security with a bank in China, which will then instruct an overseas branch to grant a loan to an overseas related party of the Chinese company. Technically speaking, the Chinese company must own the overseas company. In practice, this requirement is not always followed by banks.

Other than those ways of moving cash offshore, which are technically legal, there are other alternatives. But most of those alternatives are within the grey area and some even directly violate the Chinese foreign exchange rules. One example is to move cash offshore by using an underground fund remittance agency. https://www.zhonglun.com/

How to implement strong Family Governance?

How to implement strong Family Governance?

When dealing with family governance, family advisors should keep in mind the following steps: establishing a proper diagnosis of the family needs, implementing appropriate tools and increasing involvement toward family.

Implementing strong family governance

First, family advisors must pay particular attention to the following: family governance cannot and must not be mixed up with corporate governance, even though family play a key role in family held corporations. Both entities do not follow the same goals and are therefore not subject to the same kind of management.

Family governance must be understood as a body of rules and tools designed to enable the family to be more efficient when dealing with its own goals and with a family held corporation.

Hence specific tools should be set up. To determine those tools, officers and advisors should go through several steps and should have a comprehensive understanding of the family, its goals and the individuals who are parts of it. In order to so, Advisors should first establish a proper diagnosis. This step is by far the most important one and Advisors should ask any questions they think are relevant to establish it, during personal and confidential interviews with each family member.

At the end of this step Advisors should have a clear representation of the family: its members, a clear understanding of their responsibilities and their place in the family, how each individual is seeing himself in the family and how each of them is being seen by the others.

A comprehensive knowledge of the family assets must also be made available to the Advisors who should then rank them according to the family goals. It is to be noticed here that the most valuable assets for a family may not have a high worth. Advisors must therefore pay attention to the history of the family and its core value.

This is one of the reasons why family governance differs significantly from corporate governance. Legal advisors may become useful at this step in order to solve any issues regarding the right of each members of the family. It is also to be noticed here that understanding a family organization and history can take time. It is important for adviser to spend time with the member of the family.

In order to help family advisors to reach this first step they may design and use grids, filing them during personal interviews with each family member or by asking those members to file them later. It is important that those members have the feeling that they can disclose everything and that they are free to ask any questions. To avoid waste of time it is recommended that those questionnaires use “yes or no” questions or a scale of value.

Two elements must be analyzed with particular attention: the already existing family organization and what bring its members together. Those elements can be analyzed through several criteria. Communication between members about common goals is particularly relevant.

Once the diagnosis has been established it must be communicated to the family members and should be subject to discussion. This would constitute a first step toward implementation of good family governance.

If the diagnosis of the family situation was properly made, the second step should be easier. Indeed, this step is basically the development of family governance tools, helping to create and maintain a common interest in the family. Those tools can be different and must be adapted depending on the needs of the family, its members, their level of education and level of involvement. As examples, a code of conduct, an association, a foundation, a corporation, a family trust or a contract embodying and formalizing the relation inside the family could be used. This can also be used to help the family to reach its goals by making management of the assets easier.

Nonetheless, it is important to keep in mind that those tools are only tools. They must be able to change when required in order to always meet the needs of the family, its evolution over time and its projects. Therefore, governance of the element that embodies the family organization must be implemented as is the governance of the family. Legal and business advisors could be very useful to help determining the most appropriate tools, their legal consequences and the tax consequences that may arise. Indeed, each country may offer different legal and business tools which could be used to reach different goals.

All members of the family should get involved in this organization and have some responsibility in it. This how family governance leads to great success. Furthermore, this would help to foster communication, relations and would improve commitment of the individuals to the family.

It is important to be noticed that in France, for example, but this could be generalized to most country, 67% of the family held corporations who did not succeed to stay in the family for more than three generations failed to do so due to lack of communication, according to the family members. Hence, family advisors play a key role in family success. Indeed, they must be able to facilitate communication and to understand evolutions of the family: they are a link between generations. Family advisors must meet members on a regular basis in order to know them and to meet the future needs and evolution of the family.

At this point it might be useful for the family advisors to organize seminars, in addition to the family meeting that could be held, in order to provide family with training on very specific subject such as finance, law, business, tax… It is also a good opportunity to strengthen family tie: it might be a good opportunity for individuals living far from each other to meet and discuss. Those seminars should not be held too frequently and should stay the occasion to discuss very specific subjects which take time to think about: the level of information that individuals will have to understand is fairly high and presence of the whole family is necessary.

Finally, family advisors, in order to serve the family will have to rely on a well established network of lawyers, business and financial advisors. Family advisors will be the one who find those experts and who will organize their intervention. More than pure technical subjects those professionals should work on the family governance with a global approach, close to the one required for family advisors.

 

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Strong Family Governance

Jérôme Barré

Yards Avocats