High net worth family charters, protecting family and wealth

A Family Charter should not be looked at as a piece of literature to work on, perfect and store in a drawer. It has a specific use and it should address a minimum of critical and important matters of concern to the family.

What is the Role of a Family Charter?

A Family Charter will help reduce any future frictions among family members. It entices them to keep the bond on, and the business in the Family; and provide them with a taste of the ingredients that have been behind the success of the business in the past, hoping that they will follow suit and that the generations to come will perpetuate such success and secure a stream of income to the Family members year after year.
It is by all means a Guide; a guide that provides directions for Family members with respect to the Family business and assets, addressing all their aspects and suggesting roadmaps to follow for the achievement of the Family objectives.
It is also a Family Bonding Agent. The earliest a Family Charter is entered into by Family members the best. It is essential that they do that at a time when the least issues are pending among them, so that they feel relaxed when attending meetings and going through discussions to address all matters of concern, with an open spirit, realistic approaches and a determination to reach a consensus over all topics to be included in the Charter. It builds a bond among the Family members and enhances the solidarity that is so crucial to the perpetuation and consolidation of such bond.
Governance rules and principles are no longer the privilege of, or the requirements in, listed corporations. They are useful in unlisted corporations and even in private companies and also, why not, in NGOs, and Families. A Family Charter is a Family Governance Organizer. In fact, it is a genuine governance tool. It addresses aspects regarding the functioning of a Family, its meetings, decisions, etc… It is a framework for Family members’ inter-actions. A Charter set for the Family members is a forum to exchange ideas and opinions and take decisions over issues and matters of mutual interest and concern, in an orderly and conclusive manner. A proper governance in running the Family affairs yields excellent results; it encourages and instills transparency and openness in administering the Family assets.
It is also a Succession Planner. It helps Family members plan their way forward. What are the Family bodies? Who manages them? How will the Family manage its succession? How will the assets be devolved once a Family member passes away? Who will get what? Moreover, which branch of the Family shall, if any, be entitled to lead? How does the control of a Family operate?
It can also be a Complementary Arrangement to more formal documents. In the event all or some of the Family members have already entered into some types of more formal arrangements, regulating their common business or assets; such as articles of association of their jointly owned companies; or shareholders agreements, etc…they can provide in the Family Charter for all items that have not been addressed in such documents. A lot of small details may not be appropriately set out in organizational documents that are typically public documents, and/or documents that are required at public official departments. Family secrets are better kept in side documents to whom only a limited number of persons have access. Hence, the Family Charters are ideal venues to house such secrets.

What are the Contents of a Family Charter?

Family Charters may never be identical, due to the fact that they are reflective of contents and concerns that are not unique, and are sometimes very different depending on the families, their belongings, creeds etc…. Below are some of the items that may be included in Family Charters; each Family may pick and choose, amend, add and cancel as best fits its particulars and specifics:

Family Vision and Mission Statement: Setting out, from day one, the Family Vision and Mission Statement helps the coming generations to use them as guidelines so that the main focus set by the main settlor, to become with the years an ancestor, is not lost over the years. The Family Vision is a genuine compass to show the way to the Family members and, more importantly, to tell them every now and then how far off they are from the borderlines that the Mission Statement will have drawn, as well as from their destination.
Family History: It will be interesting and rewarding for the descendants in the Family to know where their ancestors came from, where are their roots. Therefore, the Family Charter may elaborate on the Family background, setting out, when possible, a Family tree and, where applicable, a list of those Family members who have left their prints in the Family, in their community and in their country. Family history is probably the most unique and distinctive feature of what Family members have in common; it is made of ancestry, legacy and heritage.
Family Values: Moral, economic and political values may be included in a Family Charter, such as: Faith, Solidarity among Family members, Solidarity towards the public at large, Philanthropy and Charity, Patriotism and Nationalism, Integrity and High Morals, and as many other values as the culture of the Family wish to have embedded for its members to live by. One of the real values that seems to be overlooked by Family members, which needs to be mentioned in their Charter, is the “Health and Safety”. Needless to say that the COVID-19 pandemic, that changed the world, rings a loud bell. Members of the Family ought to organize, in a scientific way, the care of their own health. H&S directives are best reminders of their importance when built in a Family charter. The healthier Family members are, the better their performance is.
Family Assets and Family Business: Family Charters deal extensively with Family assets. These are of many types, depending on the Family’s wealth magnitude and investment policies and strategies. A comprehensive assets portfolio typically includes productive corporate assets, non-productive corporate and non-corporate assets, liquid assets and any other type of movable and immovable assets. Family Charters address the assets matter in terms of their ownership, preservation and maximization. What assets to acquire? to keep? to protect and how? what assets to dispose of and when? Family Charters may also stipulate that some real assets may never be sold, but rather leased out in order to generate income to sustain Family expenses.
Miscellaneous: In addition to the above, the Family Charter may include other topics, such as guidelines for charitable and philanthropic endeavors; Family members’ health care; Succession Planning, grounds for the amendment of the Family Charter and procedural means and ways for effecting such amendment, as well as any other matter that a Family feels that it needs to be raised or regulated in the Charter. https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb

Saba Zreik

Manal Consultancy

 

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 charter

Philip van Hilten

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

Middle Eastern Family Business: Inheritance Laws and Family Divisions

Middle Eastern Family businesses are challenged by generational change, due to the combined effects of inheritance laws, companies laws, large families and rivalry amongst heirs, challenges which are usually recognized when it is too late.

Internal threats to Middle Eastern Family business

Many Middle Eastern family businesses have been remarkably successful and have become true financial and business powerhouses. Paradoxically, even the most successful families often have dangerous fault lines within, and they fail to recognise potential lethal threats from the inside before it is too late.

Fault Lines Within

Dangers from within the family are subtle and these problems are often more difficult for the founder or other family members to perceive or acknowledge, let alone tackle in an effective manner. But even hairline cracks in the family can widen and invite disaster, particularly where the cracks are disagreements between siblings, the family’s bridge to the next generation.
In 1967 fine corrosion cracking triggered a catastrophic collapse of the Silver Suspension Bridge across the Ohio River in West Virginia, under the twin stresses of low temperatures and high bridge loading. A total of 46 people in motor vehicles died when they fell into the river with the bridge. Likewise, in families, the twin stresses of leadership transition and business pressures can open up differences between siblings or cousins and can lead to the disintegration of the fabric of the family and the business.

The Middle Eastern Cultural Context

Most Middle Eastern family businesses were started by one or two founders who retain ownership of the equity. In the wings awaits a fresh generation of owners, and the number of heirs in the wings is often large, because the culture in the Gulf region favours large families. It is one thing to build a successful business, it is quite another task to imbue every stakeholder with a culture promoting the cohesion and continuity of the family in nurturing and growing successful business enterprises over generations.
Regardless of whether or not a particular sibling understands the family business or embraces the culture, the Middle Eastern inheritance laws guarantee that this sibling will receive an inheritance share commensurate with each other sibling of the same gender, and the Middle Eastern companies laws in the Gulf region guarantee that any heir inheriting shares will have one vote for one share inherited. This combined force of inheritance laws and companies laws means that for most families in business there is absolutely no guarantee that equity and the voting power will be vested in those heirs with the knowledge, ability, character and commitment to lead the family enterprise. Those heirs who do have the training and experience are commonly outnumbered and outvoted by other heirs without these qualities.
The control of family business assets is a key which may unlock a vast reservoir of financial power, social prestige and an enviable lifestyle, so it is natural that there should be rivalry amongst heirs to lead the business. Add the element of sibling rivalry as an overlay and it can be seen that there is real potential for family business disagreements to escalate, particularly at the time when the founder ceases to play an active role.
For these reasons, the inevitable transition associated with generational change and the inheritance process carries with it the potential to develop into an existential threat to the continuity of many Middle Eastern business enterprises. Even where the family business does not break apart, the paralysis of decision-making and the need for complete unanimity in the post-founder era may cause a gradual erosion of the business and asset base.

What Can Middle Eastern Families in Business Do?

The first and the most important thing is to realise that in many cases the past history of the family and its enterprises may not be a reliable guide to what will happen in the future, so something must be done to secure the future.
A family which has a desire to sustain and grow a business together must:

(a) develop a vision;

(b) generate a consensus to embrace the vision;

(c) formulate a plan to take the practical steps to ensure the vision continues (including a succession or stewardship plan); and

(d) implement that plan in an effective way with the best advice.

What Can Families’ Legal Advisers Do?

There are clearly limitations as to what legal advisers can achieve in managing close familial relationships. However, good legal advisers can help, particularly where the atmosphere in the family remains positive. For example they can:

(a) suggest that the family needs to work together to develop the right succession plan and framework of arrangements to promote stewardship, continuity and an orderly transition when generational change occurs;

(b) make sure the right questions are asked and addressed even though the questions may be tough (e.g. should present or future in-laws have a role in the business?);

(c) encourage the creation of safety valves, because if a minority of family members becomes locked into a structure which others control they may feel they have no choice but to fight to break up the business, unless the minority is provided with a fair exit option.

Conclusion

1. Family businesses are vital to the lifeblood of Middle Eastern economies and societies but there is a great need to educate families on the need to put in place the structures and governance platforms necessary for future continuity, harmony and growth in the business enterprise. The hidden economic and social costs of families in business which are dysfunctional are very high, measured in lost business revenues and missed growth opportunities. The family must put in place a leader or a leadership group which can act decisively to move the business forward. Well structured arrangements are needed to head off the ultimately destructive process of open conflict and litigation within families.
2. The challenge for families is to apply the right guiding principles for good corporate governance to build a cohesive family and business dynamic for the good of future generations. Otherwise, the bridge to the next generation will crack and fail, and the family legacy will be lost.

Note: An extended version of this article was first published in “The Oath”, the Middle East Law Journal for Corporates in May 2014. https://www.linkedin.com/in/gary-watts/?originalSubdomain=au

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.

Family governance – Getting the basics right

Family Governance – Getting the basics right

Advantages of family businesses

What makes family business different from ordinary businesses is that they commonly have a small base of manager-owners. This can translate into fast strategic decision-making. At the same time, family shareholders are more likely to take a long-term view of the development of their company than financial investors thus giving more importance to sound basic structures and operational principles. Contrary to businesses held by unrelated owners, family businesses are conducive to a family ethos being realised and shared within the business. Lastly, but importantly, a family-run business regularly has access to the capital of the family and its members.

Despite this positive background, tensions in family-run businesses eventually and inevitably arise. Running a business operation is an inherently organic, multifaceted and ever-changing challenge putting to the test family structures comprising different attitudes, age groups, genders etc. To successfully mitigate or avoid such tension ownership and management are often and must frequently be separated. It is vital that such situations are addressed progressively and timely.

Family charter

Family run businesses frequently experience tensions between family interests and commercial necessities. In order to accommodate and balance these sometimes juxtaposing interests it is vital that the family owners draft fundamental principles that they want to adhere to and enforce in the running of their business. This is essentially what family governance is about: agreeing on control mechanisms and clear regulations to protect the business against undue influence and the exertion of power by family individuals and intrusion from outside. Such principles and mechanisms can ensure the necessary stability for the business to flourish.

These fundamental decisions on the family goals and values as well as the instruments for achieving and implementing such aspirations are best laid down in a family charter. The family charter should address the family goals such as increasing the value of the business or the realisation of personal ambitions by family members, who should be involved in the management (family members or outside managers), what direction the development of the business should take, what financial expectations the family members have, how the business should be funded, how ownership is structured and what place the family business takes in respect of the overall wealth of the family.

Further, the family charter should deal with the values of the family. Which are the sources of pride of the family which should be upheld in the business? What corporate culture does the family wish to cultivate in the business? What is the family’s view on corporate social responsibility and its commitment to the general public?

Finally, the family charter should set out by which instruments the family goals will be implemented in the business. How is the family organised and how are decisions made? Which are the channels of communication among the family members and to the outside world? Which are the crisis scenarios and emergency procedures should the business strike existential difficulties? How are disagreements amongst family members resolved, who has the final say and what is the status of minority family members?

Since values change with the passing of time, the family charter should make allowance for its revision or restatement after certain intervals.

Wealth strategy

The aim of a wealth strategy is to ensure the survival of the family assets for posterity by allocating the family estate to various sectors of investments. Wealth strategies include options for family members to exit the family company. Setting up a wealth strategy should take into consideration the personal development, needs, assets and risk trends of the family individuals whilst dividing the family’s wealth into a variety of investment fields such as participations in companies, real estate, securities and alternative types of investments such as art.

At the same time it is important to secure that both the chosen investment fields remain independent from each other and at the same time, family wealth is kept separate from commercial assets used for daily operations.

The wealth strategy is an important guideline for the family and should be approved by the family council. https://www.prager-dreifuss.com/en

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