Issuesproblems in succession of africa and asian owned business


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Issuesproblems in succession of africa and asian owned business

  1. 1. Passing on the mantle – succession planning for closely held and family businesses Karl J. Veldkamp Veldkamp Barristers & Solicitors, Toronto Carlos Valls Iuris Valls Abogados, Barcelona Carlos.valls@iurisvalls.comIn a well attended afternoon session, the Closely Held and Growing Business EnterprisesCommittee opened its Annual IBA Conference in Buenos Aires on Monday 13 October 2008 onsuccession issues in family owned businesses. The session was co-chaired by StephanieDenkowicz (Alston & Bird LLP, New York, NY) and Dr. Thomas Kaiser-Stockmann(Mannheimer Swartling, Berlin).The session started with a short address by the Chair of the Committee, Alberto Navarro, whopresented briefly the program of the Committee for the Conference, and reminded the audienceof the mission of the Committee, which is focusing on three key needs of these types ofbusinesses, namely their management, ownership and finance. Navarro added an invitation tonew members to join, and encouraged current members to participate in the activities of theCommittee in any form, e.g. collaborating on the Newsletter and web-site. He also reminded theaudience of upcoming events, such as the Berlin Conference next April 2009, the Conference inNigeria in 2010, and the Conference in Shanghai [in 2011].The Session Co-Chairs briefly introduced the speakers Beat M. Barthold (Frorriep Renggli,Zurich), Fernando de las Cuevas Castresana (Gómez Acebo & Pombo, Madrid), José AntônioMiguel Neto (Miguel Neto Advocados, Sao Paulo), Michaeline Gordon (Stahl Cowen CrowleyAddison, Chicago), and Rachel Eng (Wong Partnership, Singapore). Denkowicz stressed theCommittee’s interest in new participants, and Kaiser-Stockmann discussed the BerlinConference in 2009, a joint initiative with the European Forum and the AIJA.Importance of the topicDenkowicz and Kaiser-Stockmann then introduced the topic of the session. They stressed theimportance of family owned businesses, not only due to their large number, making them themost common type of business organisations, but also as examples of top worldwide players,like IKEA, WALL MART, SAMSUNG, etc.;clearly representing the main employers in theworld economy. All these businesses face, at a certain stage, an expectation of change ofownership, which implies a clear opportunity for lawyers. One of the possibilities of thistransfer of ownership (along with selling it to other companies, to management or to investors)was implementing a succession within the family, which requires particularly careful planning.Key features for succession planningThe Session Co-Chairs then asked the panel to comment in response to a series of questions onthe specific aspects of the session. Neto started by informing the audience that in Brazil mostcompanies are in their first generation, and the first problem to tackle is to convince the owneror patriarch that they will pass away eventually, as they often do not act as this is a possibility.(“if one day I die…”). Neto stressed the importance of ascertaining what they need, identifyingwho the members that can or wish to continue the business are, and stressing the importance of 1
  2. 2. tax planning in the process. Barthold confirmed, in his experience both Swiss and European,that many owners still do not think about or plan succession, and that he was seeing an increaseof managers acquiring family-owned business, as opposed to succession within the family. Asfor succession, Barthold pointed out the importance of the emotions it entails, which have to betaken clearly into account, and identified four goals in planning a successful transition, namelythe survival of the company, maintaining its independence, ensuring the financial security of thefamily, and avoiding conflicts between family members. As for the main features of planning,Barthold mentioned timing, financing and pricing.De las Cuevas recalled that there are two levels of management, the company and the family,and stated that the key factor in successful succession planning is drafting a family protocolwhich identifies the successor, the dividend policy, the structure of the company, theclarification of the company assets, etc. In her view for the US, Gordon stressed in particular theimportance of careful tax planning (inheritance tax and the complication of multiplejurisdictions), and also encouraged, when possible, the intervention of psychologists. The viewfrom Asia was brought by Eng, who mentioned that Asian owners had less education than theirsons, having sent them to US or UK universities, and that when they return to Asia there may besome conflicts between generations in the operation and succession of the business. Eng was infavour of the occidental model of planning, and stressed that generally there was not aninheritance tax in Singapore.From the audience, Michael Katz (Edward Nathan Sonnebergs Inc, South Africa) added theimportance of the issue of how to retain control of the company in the succession process inlisted companies with family owned control.Again from the audience, Philip Van Hilten (Loyens & Loeff, United Arab Emirates)commented that in countries where the Sharia rules apply, succession planning, and talkingabout it, can be particularly difficult, given that mentioning to the owner that he may pass awayis forbidden.Legal and business structural issuesDe las Cuevas opened this topic by defining what features differentiate family owned businessfrom the rest, by assessing the pros and cons of the company staying family owned. Asadvantages, he mentioned their flexibility, long term view, commitment, social responsibility, inthe form of loyalty to employees, the excellent products quality, and the high capitalisation. Asdisadvantages, he identified the potential bad relationship between family members, thenepotism, the lack of planning for growth and the confusion between family and companyassets. As a neutral, though interesting, aspect, he stated that CEO’s stay on average 36 years intheir post. Gordon added, as negative factors, the lack of transparency and that many people notnecessarily involved in the business were dependant on the company. Eng concluded that thedifference between family owed and other businesses is not so much the legal structure, but inthe decision making process utilized. As an example, management mistakes did not end up withfiring a family member. She noted that frequently there were other agendas which influenceday to day decisions.As for the establishment of family owned businesses, Neto and Gordon both recommended, if atall possible, moving away from limited liability companies, based on the personal relationships(more intuitu personae) as they risked, in situations of confrontation, the possibility of membersclaiming liquidation. Instead they recommended using the corporation’s structure which is moreregulated and has more guarantees for the shareholders even if this form is less flexible.Worldwide financial crisis and its impact on closely held and family businesses 2
  3. 3. Barthold noted the current reluctance to do deals, but the number of transactions may increase,as family businesses are well capitalised, and prices will become more realistic. Kaiser-Stockmann pointed out the possibility of fewer financial deals, but an increase in industrialstrategic deals. De las Cuevas observed that the crisis would no doubt have an effect on them –less consumption, less turnover – but as they are less indebted, they will do “less badly”.However, it may have, as a consequence, the postponement of succession talks, even thoughthere will be less possibilities of change of control (less private equity deals, less listings). ForGordon, this is a particularly good instance for deeper protection of assets (eg, via trust holdingentities). In Brasil, Neto noted that many businesses had speculated with the currency, buyingdollars in the expectation that the dollar would increase its value, but the dollar has had a sharpdecrease against the Escudo, and this speculative loss can be a very serious one indeed, whichhe qualified as the “Brasilian subprime”. In Asia, Eng stressed the conservative character ofowners, which have them less exposed comparatively (except those needing re-financing).However, the bank-business relationship in Asia tends to be trust based and therefore lacktransparency, which could potentially lead to default situations.[Further questions and remarks from the audience]Selecting successors: outside vs. familyMethodologically, the first decision to be made when considering a transition is when the issueshould be raised with the owner. Eng suggested external factors, as the need of more capital, asan initial trigger, and Gordon focused internally, recommending that succession be dealt with“really, and often”, and changing the question to a long term view, including extending thevision of the way forward, and communicating it. Barthold suggested that the training of thesuccessor can already start early on, even if the details of the process have not yet been thoughtabout.In deciding whether succession has to fall within the family, or with the integration of anoutside professional, De las Cuevas considered that, whilst family members can be an advantageas they have the company culture enrooted, ability becomes the issue, which has to be assessedobjectively, and concluded that, if both aspects are the same, the family member should prevail.Eng added that if the heir is not prepared yet, the company can resort to an interim CEO (or atutor guiding him or her, noted Neto), which Gordon confirmed. Gordon stressed that coming inat the right time was key.Persuading the family to plan the succession in advance and carefully is again, according to thepanel, a difficult exercise, particularly if the company is doing well, unless their ambition is todo better. Outsiders were clearly recommended to assess the process and possibilities (De lasCuevas) and, again, the intervention of psychologists was indeed recommended (Neto).The last issue discussed on the selection of successors was the form of compensation of outsidemanagement during and after the process. Fixed marked salary was the consensus as the startingpoint, and interesting ideas or comments where brought forward to complement it: Bartholdmentioned a bonus based on performance, but ensuring that the job was assumed out of passion,not for economic reasons; Eng definitely rejected the idea of giving equity to outsidemanagement; Kaiser-Stockmann pointed out that for family non-successors, benefits could bemore flexible (eg cars); Neto concluded that without a bonus no one would work, and linked itto a business plan approved by the family.Preparing family members as successorsThere was a consensus amongst the panel on De las Cuevas’ proposal for a three step process:(i) educating the successor during 2 to 4 years; (ii) making him work in a different company ofthe same sector (whether a direct competitor, a client, a supplier, etc.); and (iii) spending some 3
  4. 4. years of training with the patriarch. The Chair of the Committee, Navarro, went further to saythat successors should in fact be prepared to “do it on their own”, to be within the head-hunters’radar, and be particularly prepared to be owners, rather than managers.Current trendsIt was unanimously agreed that the complexities and challenges of today’s businessenvironment (inter alia, due to consolidation and globalisation) makes the succession processincreasingly complex. Some realised that in fact increasingly family businesses are being sold,as opposed to continued through succession, partially perhaps due also to need to access finance(Eng, Neto).Barthold and Kaiser-Stockmann identified the following trends: (i) more professionalism withinthe company business structure; (ii) more transparency; (iii) more structuring with less time(increasing complexity); (iv) moderation in prices (as an expectation); (v) decrease ofsuccession vis-à-vis other solutions; and (vi) family and private enterprises acquiring listedcompanies, adding an element of complexity to the analysis. Gordon closed this list with herinitial remark that succession was inevitably driven by tax considerations, and emphasized thisremark by the importance of estate planning, or the increasing regulations on gifts.In closing, the panel fully agreed with De las Cuevas’ final remark that hundreds of thousandsof businesses are facing succession, and they need guidance in the process, a clear opportunityof lawyers. 4