1. Passing on the mantle – succession planning for closely held
and family businesses
Karl J. Veldkamp
Veldkamp Barristers & Solicitors, Toronto
kveldkamp@veldcamp.ca
Carlos Valls
Iuris Valls Abogados, Barcelona
Carlos.valls@iurisvalls.com
In a well attended afternoon session, the Closely Held and Growing Business Enterprises
Committee opened its Annual IBA Conference in Buenos Aires on Monday 13 October 2008 on
succession issues in family owned businesses. The session was co-chaired by Stephanie
Denkowicz (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, who
presented briefly the program of the Committee for the Conference, and reminded the audience
of the mission of the Committee, which is focusing on three key needs of these types of
businesses, namely their management, ownership and finance. Navarro added an invitation to
new members to join, and encouraged current members to participate in the activities of the
Committee in any form, e.g. collaborating on the Newsletter and web-site. He also reminded the
audience of upcoming events, such as the Berlin Conference next April 2009, the Conference in
Nigeria 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 Antônio
Miguel Neto (Miguel Neto Advocados, Sao Paulo), Michaeline Gordon (Stahl Cowen Crowley
Addison, Chicago), and Rachel Eng (Wong Partnership, Singapore). Denkowicz stressed the
Committee’s interest in new participants, and Kaiser-Stockmann discussed the Berlin
Conference in 2009, a joint initiative with the European Forum and the AIJA.
Importance of the topic
Denkowicz and Kaiser-Stockmann then introduced the topic of the session. They stressed the
importance of family owned businesses, not only due to their large number, making them the
most 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 the
world economy. All these businesses face, at a certain stage, an expectation of change of
ownership, which implies a clear opportunity for lawyers. One of the possibilities of this
transfer 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 planning
The Session Co-Chairs then asked the panel to comment in response to a series of questions on
the specific aspects of the session. Neto started by informing the audience that in Brazil most
companies are in their first generation, and the first problem to tackle is to convince the owner
or 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, identifying
who the members that can or wish to continue the business are, and stressing the importance of
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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 increase
of managers acquiring family-owned business, as opposed to succession within the family. As
for succession, Barthold pointed out the importance of the emotions it entails, which have to be
taken clearly into account, and identified four goals in planning a successful transition, namely
the survival of the company, maintaining its independence, ensuring the financial security of the
family, 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 protocol
which identifies the successor, the dividend policy, the structure of the company, the
clarification of the company assets, etc. In her view for the US, Gordon stressed in particular the
importance of careful tax planning (inheritance tax and the complication of multiple
jurisdictions), and also encouraged, when possible, the intervention of psychologists. The view
from Asia was brought by Eng, who mentioned that Asian owners had less education than their
sons, having sent them to US or UK universities, and that when they return to Asia there may be
some conflicts between generations in the operation and succession of the business. Eng was in
favour of the occidental model of planning, and stressed that generally there was not an
inheritance tax in Singapore.
From the audience, Michael Katz (Edward Nathan Sonnebergs Inc, South Africa) added the
importance of the issue of how to retain control of the company in the succession process in
listed 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 talking
about it, can be particularly difficult, given that mentioning to the owner that he may pass away
is forbidden.
Legal and business structural issues
De las Cuevas opened this topic by defining what features differentiate family owned business
from the rest, by assessing the pros and cons of the company staying family owned. As
advantages, he mentioned their flexibility, long term view, commitment, social responsibility, in
the form of loyalty to employees, the excellent products quality, and the high capitalisation. As
disadvantages, he identified the potential bad relationship between family members, the
nepotism, the lack of planning for growth and the confusion between family and company
assets. As a neutral, though interesting, aspect, he stated that CEO’s stay on average 36 years in
their post. Gordon added, as negative factors, the lack of transparency and that many people not
necessarily involved in the business were dependant on the company. Eng concluded that the
difference between family owed and other businesses is not so much the legal structure, but in
the decision making process utilized. As an example, management mistakes did not end up with
firing a family member. She noted that frequently there were other agendas which influence
day to day decisions.
As for the establishment of family owned businesses, Neto and Gordon both recommended, if at
all 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 members
claiming liquidation. Instead they recommended using the corporation’s structure which is more
regulated 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
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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 industrial
strategic 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 though
there will be less possibilities of change of control (less private equity deals, less listings). For
Gordon, this is a particularly good instance for deeper protection of assets (eg, via trust holding
entities). In Brasil, Neto noted that many businesses had speculated with the currency, buying
dollars in the expectation that the dollar would increase its value, but the dollar has had a sharp
decrease against the Escudo, and this speculative loss can be a very serious one indeed, which
he qualified as the “Brasilian subprime”. In Asia, Eng stressed the conservative character of
owners, 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 lack
transparency, which could potentially lead to default situations.
[Further questions and remarks from the audience]
Selecting successors: outside vs. family
Methodologically, the first decision to be made when considering a transition is when the issue
should be raised with the owner. Eng suggested external factors, as the need of more capital, as
an 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 the
vision of the way forward, and communicating it. Barthold suggested that the training of the
successor can already start early on, even if the details of the process have not yet been thought
about.
In deciding whether succession has to fall within the family, or with the integration of an
outside professional, De las Cuevas considered that, whilst family members can be an advantage
as they have the company culture enrooted, ability becomes the issue, which has to be assessed
objectively, 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 a
tutor guiding him or her, noted Neto), which Gordon confirmed. Gordon stressed that coming in
at the right time was key.
Persuading the family to plan the succession in advance and carefully is again, according to the
panel, a difficult exercise, particularly if the company is doing well, unless their ambition is to
do better. Outsiders were clearly recommended to assess the process and possibilities (De las
Cuevas) 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 outside
management during and after the process. Fixed marked salary was the consensus as the starting
point, and interesting ideas or comments where brought forward to complement it: Barthold
mentioned 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 outside
management; Kaiser-Stockmann pointed out that for family non-successors, benefits could be
more flexible (eg cars); Neto concluded that without a bonus no one would work, and linked it
to a business plan approved by the family.
Preparing family members as successors
There 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 of
the same sector (whether a direct competitor, a client, a supplier, etc.); and (iii) spending some
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4. years of training with the patriarch. The Chair of the Committee, Navarro, went further to say
that 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 trends
It was unanimously agreed that the complexities and challenges of today’s business
environment (inter alia, due to consolidation and globalisation) makes the succession process
increasingly 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 within
the company business structure; (ii) more transparency; (iii) more structuring with less time
(increasing complexity); (iv) moderation in prices (as an expectation); (v) decrease of
succession vis-à-vis other solutions; and (vi) family and private enterprises acquiring listed
companies, adding an element of complexity to the analysis. Gordon closed this list with her
initial remark that succession was inevitably driven by tax considerations, and emphasized this
remark 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 thousands
of businesses are facing succession, and they need guidance in the process, a clear opportunity
of lawyers.
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