From Founder To Family: How Global Businesses Can Protect Ownership, Control And Continuity Across Generations

The founder of an international business typically spends years or decades building the enterprise, accessing different markets and nurturing a management team capable of succeeding them in the role of chief executive. The structures designed to govern the transfer of power and ownership, however, often fail to be fully thought through until a succession crisis is at hand.

 

For a multinational enterprise, the succession planning is more involved than mere considerations of who gets a bigger slice of the founder’s equity. It often encompasses a number of interrelated but distinctly different issues, including the location of the family’s assets, the nationalities of the founder’s dependents, the directorships controlled by them and the loan agreements secured by the enterprise.

 

This is because a family member’s ownership of a business may be located in one jurisdiction, its operating entities controlled from another, the founder’s liabilities domiciled in a third and the nationality of the potential heir located in a fourth. In addition, the family’s ownership structure will need to take into account the voting rights, management responsibilities, wealth and dispute resolution mechanisms that the founder wishes to grant or deny to different lineages of descendants.

 

While there is clearly overlap between these matters, ownership and management are not the same matter. A founder’s daughter may not be entitled to vote on the company’s matters or lack the skill to fill the founder’s shoes, while a capable chief executive may be deprived of an economic interest in the enterprise.

 

International family groups, however, must consider such factors especially when transitioning from founder-led to family-controlled mode of governance. Failure to fully appreciate the nuance of the founder’s intentions can lead to dilution of voting power, liquidity constraints of the shares and even protracted family and shareholder disputes over the wealth and control of the business.

 

Ownership And Management Are Different Questions

 

The succession planning for international businesses must always seek to decouple ownership and control, so as to ensure that the founder’s views on the distribution of economic benefits are not conflated with the management prerogatives of the surviving shareholders.

 

A founder may, for instance, intend for their children to enjoy the economic returns from the business while reserving for themselves the right to make decisions on its operations, or have one daughter run the enterprise while giving the others a share of the economic proceeds. This can be useful, for instance, when the founder has insufficient confidence in the capabilities of the potential heirs but stands to benefit from their active involvement in the enterprise.

 

The founder’s views on this matter will largely dictate the class of shares that can be issued to the potential heirs. In most cases, the economic and voting rights of ordinary shares are determined by the company’s constitution and the relevant company law.

 

The different categories of shares will therefore dictate the extent to which a family member can participate in the management of the business, vote on matters of importance and receive dividends from the company. It is important to note, however, that such rights are subject to the terms of any trust, will or shareholder agreements that apply to the shares.

 

This consideration is particularly relevant to international enterprises as it seeks to address the divergent legal requirements of different jurisdictions. For instance, the right to transfer or subscribe to new shares may be subject to specific restrictions in the company’s governing documents, which in turn can affect the flexibility of fundraising, share buybacks and the overall control by the founder.

 

A family business, accordingly, should always consider separating the transfer of economic benefits from decision-making authority. This means that the succession process should always consider the differences between the appointment of directors and the transfer of shares. Even after the death or incapacitation of the founder, company law, directorships, fiduciary duties and management responsibilities still apply. The family members, for instance, cannot simply expect to step into the shoes of the founder and take over the running of the enterprise.

 

For international family businesses, the succession plan should always consider whether the family needs to retain control of shares while engaging independent professional managers, or have a family member as the chief executive while having independent directors who hold a substantial economic interest. This is especially true for businesses with complex commercial structures, such as those that operate subsidiaries and engage in franchising.

 

Shareholder Agreements Can Prevent Disputes

 

A shareholder agreement is often a vital element of succession planning for family businesses with multiple family shareholders, outside investors or business partners. It is a contract that sets out the terms governing the relationship between the company and its shareholders. The agreement can be used to set out the process for transferring shares, appointing directors, resolving disputes and addressing the death, incapacitation or resignation of a family member.

 

Most agreements of this nature usually have pre-emption rights that allow an existing shareholder to buy any shares that another family member wishes to sell. Such a right helps to maintain the family’s majority voting interest while restricting the transfer of shares to outsiders. The purchase of shares will also entail valuation rights, which are designed to protect the buyer and seller from disagreements over the worth of the company.

 

Buyout agreements are particularly important in succession planning. The right to buy the shares of another shareholder upon their death, incapacitation or sale is critical to ensuring the uninterrupted continuation of the business. It is therefore important for families to consider the relevance of formula valuations or independent expert assessments for this purpose. If the company’s worth is to be calculated according to the average or median profit, for instance, a dispute is more likely to arise if the founder’s departure coincides with a dip in revenue.

 

The agreement should also address the practical aspects of the buyout. This includes whether the shares will be valued on a discounted basis, how the proceeds will be paid and who bears the cost of the buyout. For instance, if a family shareholder passes away, the remaining owners have the right to purchase their shares from the deceased’s estate.

 

By contrast, a purchase option can help to ensure that the business survives such a scenario while preventing the forced liquidity of the shares. Where possible, the purchase should be funded with insurance, thereby negating the need to raise cash to settle the claim.

 

The shareholder agreement should also be carefully tailored to the company’s constitution and local law. This is because a private agreement between the family members may not override the mandatory requirements of the company law. In addition, such an agreement may not be binding on all of the shareholders, especially if they are uninterested in the family business.

 

Such a document may also fail to override the mandatory succession laws of the relevant jurisdiction. Accordingly, the family should always consult with expert legal counsel, especially when considering the practical implications in different jurisdictions.

 

Trusts Can Separate Wealth From Direct Ownership

 

Wealth management trusts are often used in international family succession planning to separate the rights of possession and control of family wealth. By their very nature, trusts are designed to safeguard and control assets, with the settlor granting the trustees the right to deal with the assets on behalf of the beneficiaries.

 

As such, a trust can be a useful tool for an international business founder to ensure the uninterrupted continuation of the business while balancing the different family needs and succession plans. The shares can be placed in the trust, so that the trustee has the right to manage and control them while the founder and their family enjoy the benefits of ownership.

 

By virtue of the trust deed and the applicable law, the founder’s successors and other beneficiaries can have access to the proceeds from the shares. The terms of the trust can help to prevent the immediate division of the company’s shares upon the founder’s death while ensuring that the income from it is distributed according to the founder’s instructions.

 

A trust can also be useful in managing the succession needs of different beneficiaries who require regular income from the business. This can be a more practical approach than dividing the shares and allowing each heir to take a more direct role in the management of the company.

 

A trust, however, is not always the most appropriate structure for family business succession. Its use often depends on the local law and the founder’s intentions. This is because the law of the relevant jurisdiction will determine whether the trust is valid, whether the assets placed in it are subject to any limitations and how the trust interacts with matrimonial, debt recovery, forced heirship and tax laws.

 

The terms of the trust deed are also extremely relevant to its success in succession planning. The document will determine whether the settlor retains any powers, whether the trustees can control the company and how its different powers interact. Unless the trust deed provides otherwise, the terms of the company law will govern the relationship between the director, company and shareholders. In addition, the trustee must always adhere to their fiduciary duties, which often prohibit them from treating the company’s shares as an extension of the settlor’s wishes.

 

Trusts, accordingly, should be considered as a way of managing the succession needs of the founders and their dependents while keeping in mind their ability to withstand the scrutiny of tax and court officials. If the founder wishes to retain control, it is important for the trust deed to state this clearly.

 

Foundations Offer Another Route For Family Wealth

 

In some jurisdictions, foundations serve as an alternative to wills, trusts or private foundations. Unlike the latter, a foundation typically has a separate legal personality and can hold assets for the benefit of specific relatives or other beneficiaries identified in its charter.

 

These entities are typically established under specific laws, which will govern their functions and the responsibilities of their council members. For international family succession planning, a foundation can be useful in holding the shares of the company while ensuring that the control and management of the business survive the founder’s demise.

 

A foundation is particularly useful for international family succession planning, as its structure allows the founder to retain flexibility while adhering to strict local legal requirements. The documents establishing the foundation can set out how its council members are nominated, the rules regarding the appointment of directors, their responsibilities to the founder and how the enterprise should continue to operate in the event of the founder’s death.

 

The differences between a foundation and a trust are also critical to the consideration of their use in succession planning. Whereas a trust is based on a fiduciary relationship between the settlor, trustee and beneficiaries, a foundation typically has its own legal personality. The distinctions between the two structures are important, as they determine how the succession terms will be enforced.

 

A foundation, accordingly, should be considered for use in international family succession planning. It can be a useful structure for preserving the founder’s wealth while ensuring the uninterrupted continuation of the business. It is important to note, however, that incorporation alone does not ensure continuity. In addition to complying with the local laws regarding such entities, the foundation must also ensure that its ownership of the company’s shares complies with the relevant law.

 

Choosing between a trust and foundation will mostly depend on the specific requirements of the family and the laws of the relevant jurisdictions. The experience of family office or financial centre in a particular jurisdiction should not always dictate the choice of structure.

 

Wills Remain Essential To The Succession Plan

 

No matter how comprehensive the succession plan is, a properly executed will remains integral to the transition of a founder’s wealth and company shares to their dependents. A will typically identifies the beneficiaries, appoints executors, and sets out the division of the founder’s estate. It can also ensure that the assets, company shares and other valuable items are distributed in accordance with the founder’s wishes.

 

For cross-border family succession planning, however, the law applicable to a will should be carefully considered. This is because the applicable law will govern the testamentary disposition of the founder’s wealth and company shares.

 

The law of the founder’s domicile, habitual residence, nationality and the location of the property often plays a part in determining which law applies to the will. Some jurisdictions make a distinction between personal and real property, while others are more protective of family wealth and impose mandatory inheritance rules.

 

Forced-heirship laws are particularly relevant to international succession planning, especially for family business owners. They typically stipulate that a founder cannot disinherit their direct descendants from inheriting part of their business.

 

The situation can become even more complicated for international family business owners. This is particularly the case for founders whose shares are located in the UAE, India, Singapore or European financial centres while their residence and habitual location are in another jurisdiction. The will, accordingly, must take into account the relevant succession laws that apply to the different properties and company shares.

 

Separate wills can also be necessary when the applicable law does not allow a single document to govern the succession of different property types. If a founder owns different assets in various jurisdictions, separate wills may be necessary to ensure their smooth succession. It is important for the wills to be coordinated with all other estate planning documents.

 

The family should also consider how best to deal with property that has not been transferred to third parties, such as shares in privately held enterprises or family trusts. A founder’s will can also be useful in determining how their personal assets and property should be distributed to their dependents.

 

A will can also serve to appoint executors who have the legal authority to distribute the founder’s assets. In addition, the document can identify the financial institutions where the executor has access to the founder’s finances. It should also be noted that a will can revoke existing powers of attorney.

 

Family Governance Must Outlast The Founder

 

The documents described above can set out the exact terms of succession and family ownership, but they cannot dictate the conduct of the heirs. A family constitution or governance charter can help with the succession process, particularly for complex family structures. This governing instrument can set out the expectations for employment, directorships, dividend policies and the involvement of future generations.

 

It can also state the qualifications for executive positions, the circumstances under which other family members can join the board of directors and how disputes should be resolved. The document should also make it clear that the family’s role as owners is distinct from the board’s role in managing the company in accordance with its legal responsibilities.

 

Some family constitutions provide for a family council that can advise or oversee such matters as education, family charities, wealth planning, and the governance of the company. There are also family governance structures that allow the non-working members of the family to get involved with the affairs of the enterprise.

 

These instruments, however, should not replace corporate governance. The objective of family governance is to ensure that all members understand their roles while respecting the legal duties of the company’s directors.

 

The most practical way to ensure that family members fully understand the succession process is to make the terms of reference freely available to them. It is equally important to periodically review these documents to ensure that their terms still apply. It is not uncommon for the succession plan to need adjustment as the founder’s children grow up and pursue their own careers or settle in different jurisdictions. As long as the principles of family governance have been clearly articulated, their practical application can change with time.

 

Cross-Border Tax, Estate Regulations Can Change The Outcome

 

It is extremely important to consider the tax and regulatory implications of any succession plan. The transfer of a founder’s shares, both during their lifetime and after their death, can have serious tax repercussions. Estate duties, gift duties, capital gains and stamp duties, among other charges, can apply to shares transferred to the heir, depending on the applicable law. The tax implications of trusts and foundations also depend on the founder’s tax residency, the beneficiaries’ tax obligations, the location of the assets, and the extent of the settlor’s control.

 

Tax law should, accordingly, be a central consideration in international family succession planning. The succession options should be identified and evaluated in light of the potential tax liabilities and opportunities for relief. The tax implications will differ depending on whether the transfer takes place at the time of death, through a trust, foundation or a transfer during the founder’s lifetime.

 

It is also important to consider the applicable tax residence rules and beneficial ownership rules. Tax authorities may require disclosure of the ultimate beneficial owners, while financial institutions may identify the source of funds, the purpose of the transaction and the individuals who will benefit from it.

 

The succession structure should, accordingly, be carefully reviewed to ensure that it is not susceptible to scrutiny by tax authorities, creditors or courts of law. Offshore vehicle structures should not be relied on as a means of avoiding taxation, regulation or disclosure. It is also important for regulators to be aware of the existence of such structures.

 

A succession structure should also consider the impact on any regulatory approvals of the target company. In respect of the management of an enterprise in a regulated sector, the transfer of shares may require the approval of the relevant licensing authority or a review of certain change-of-control agreements. This is especially true for financing agreements, joint ventures and commercial contracts that have restrictions in respect of the transfer of shares to the founder’s heirs or a family trust or foundation.

 

A Practical Plan Begins Before A Crisis

 

The most important thing for a founder to consider as they develop their succession plan is the full breadth of their assets. It is advisable to compile an inventory of the founder’s interests in the business in order to determine the exact extent of their involvement and the responsibilities attached to them.

 

The review will typically identify the direct and indirect shares in the company, as well as the liabilities in the form of guarantees and credit facilities provided to the enterprise. The founder should also determine the intellectual property controlled by them, the private property owned, and the existing wills or estate-planning documents executed.

 

After compiling this information, the founder should identify the preferred outcome in terms of succession planning. Some founders, for instance, want a family member to run the enterprise while others intend to leave the management responsibilities to professional administrators.

 

A legal adviser can help a founder to identify the combination of share classes, shareholder agreements, wills, trusts or foundations that will achieve their desired outcome. The existing wills and documents must also be reviewed and integrated into the overall corporate and family succession plan. Particular care must be taken to ensure that the documents allow for flexibility in share transfers, voting rights, valuation, funding and the management of the company during the incapacity of the founder.

 

The succession plan should also be stress-tested against potential adverse scenarios. If the founder dies suddenly, for instance, how will the succession process unfold? If a family member has refused to inherit the company or the business incurs significant liabilities, what is the next course of action? What happens if a tax authority challenges the succession structure or a potential buyer expresses an interest in purchasing the family’s shares?

 

It is not enough to have a succession plan that only works when everyone agrees to it and the business continues to prosper. A practical succession plan ensures that wealth, power and governance continue long after the founder is gone.

 

Overall, succession planning is not a family matter, but rather a company law issue. Shares dictate wealth, governance documents define control, and estate-planning structures determine ownership. At the end of the day, it is their interaction under the laws of a particular jurisdiction that determines their practical application.

 

For international family business owners, the main aim of succession planning should be to ensure that ownership of the company survives the founder’s death or incapacitation while minimising the potential for disputes. It is important to remember, however, that the most sophisticated structures are only useful to the extent of their ability to withstand the scrutiny of government agencies.

 

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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