Families don’t always get along. Sometimes long-simmering issues come to a head and family members want out. They’d like to split up the family assets and go their separate ways.
Such divisions in multi-generational wealthy families can damage their associated businesses, long-term investments and the family’s reputation. How can a family and its advisors avoid the pitfalls of a split and mitigate the damage?
Of course, planning can go a long way to smooth a developing family rift and avoid the damage and division of family businesses, investments and property.
Family splits are rarely a surprise, says Johan van Niekerk, head of family office, U.S., for Stonehage Fleming, a global family office with a significant North American business.
“As the wealth unwinds over the generations, the different generations don’t always agree on the way that assets are distributed. … They will not always agree on the way assets are invested or whether families should remain invested in the family business,” says van Niekerk. “Those are usually the main drivers for multigenerational families to start splitting.”
An early detection mechanism could spot issues as they develop. Members of each generation should be able to raise concerns and hold safe discussions.
Consider tax jurisdictions
Governance structures can provide a roadmap for dealing with family disputes, though emotions add complexity.
“It’s a very fine balance between the legal side, ensuring all the i’s are dotted and t’s are crossed, and the family dynamics that are at play,” says van Niekerk. “One should always be sensitive to that, and the main aim is to ensure there’s a successful intergenerational transfer of wealth.”
Also complicating the exit of a disaffected family member is the fact that wealthy families are often multi-jurisdictional. “In your planning, you need to consider the different tax jurisdictions the family touches.”
For advisors guiding a family through a split, van Niekerk recommends it be run like a big project, with all advisors regularly meeting, ensuring things are happening according to plan and being updated with advice as necessary.
Tina Di Vito, partner and Canadian family enterprise leader with EY in Waterloo, Ont., says the best time to start the discussion about a dispute is today.
“I’ve had conversations with families who said to me, ‘I’m not worried about that – my kids get along so well together, they’re best friends.’ That’s wonderful, but there are things that can be put in place today to help support those families.”
Need to build trust
She also recommends that as families grow – and possibly become more distant from each other – they should increase communication and time spent together to build trust.
To create a cohesive family, its members should have effective business governance that leaves them well-informed and confident.
“That gives them the operational confidence to say we want to continue that very important asset [the family business]. In order for us to do that, how are we going to come together so our relationships don’t interfere with the running of that business?”
Families should establish a strategy – a shareholders’ agreement, for instance – that describes how a family member can exit the business and/or redeem his or her shares of stock, says Di Vito.
“It could have a clause that under certain circumstances you need to redeem your shares over a number of years,” says Di Vito. That can protect the family enterprise from the effects of a large redemption of shares, which could damage the firm’s liquidity.
Valuation of the family’s shares and assets such as private equity investments can complicate things when a family member takes out his or her share of the wealth.
Calgary lawyer Chad Johnson, a partner at McLeod Law LLP, echoes the importance of a unanimous shareholder agreement, which governs share ownership, transfer and obligations.
Shareholders’ agreement is a must
The agreement allows the family to maintain control of the family enterprise in the event that a member decides to exit by restricting the transfer of shares or preventing a third party from buying shares.
“If you have a grandson who wants nothing to do with the business, but the family doesn’t want a non-participating member to have control of the shares, [other family members] have the right to buy out that shareholder,” says Johnson.
To protect the family business in the event of a split, a lawyer should help ensure that shareholder agreements, estate planning and co-habitation or prenup agreements are put in place, says Johnson.
The shareholders’ agreement can also address how disputes are handled, including mediation and arbitration. That can keep the family business out of the courts and maintain confidentiality, Johnson says.
“They may have an entitlement to assets or to shares, but unless they have a legal basis to exit they often cannot force it, unless there’s been a breach of a legal duty, which is a very high standard,” says Clifford.
“You have to weigh the practical reality of a family member wanting to access their capital against the legal structure that’s in place for the family as a whole.”
Reputation management, too
If a trust is involved, family members may have access to income but not capital. Or, in a private company, a shareholder might not have rights to liquidity unless there’s an agreement that he or she can exit, he says.
It’s difficult to cover all eventualities in an agreement, adds Clifford. Details such as what the entitlement will be and whether it will be in money or property or an operating business have to be considered. Values and family dynamics can change, he says.
Advisors agree that reputation management also has to be considered. Mediation and arbitration, covered by confidentiality, can keep a family out of court where the proceedings are public.
Non-disclosure agreements can be brought into planning as well.
“Sometimes it takes a generation or two for those types of commercial agreements … to be put in place because by then you’re getting further beyond the founder and maybe there are restructuring transactions happening, which allow the family office to say let’s take this opportunity to improve our governance,” says Clifford, “to affirm we’ll go to arbitration rather than courts in event of a dispute.”
More from Canadian Family Offices:
- The beer-brewing family who lost it all
- Ways to transfer wealth to next generation: five kinds of trusts
- Nitty-gritty of succession: Holding a mirror to families, looking for leaders
- An ‘outlier’ year: What wealthier investors are doing, and their plans for 2023
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