Family Businesses and Family Offices: Leadership and Succession

1. Family Businesses and Family Offices: Leadership and Succession Paul Tucknott, TEP – Managing Director, Saffery Champness (Suisse) SA 4th April 2019 – STEP Conference, Mauritius

2. Stats • Only 30% of intergenerational transfer of wealth are “successful” [UBS Report] • 88% of business leaders want to leave a “stamp” and do something special with their business. [PwC Business Survey 2016] • 52% of business leaders think family politics will take up most of their time. [PwC Business Survey 2016] • 69% of Africans think the next generation will squander or mismanage the family wealth [Knight Frank 2017 Wealth Report]

3. Agenda • Example • Comments and views from our clients • Reasons for succession planning • Family Office issues • Potential Solutions – Structure types • Case Studies • What can we do as professionals? Timing, proactive, ‘modern trustee’. • Taxation issues

4. The need for planning • Vanderbilt vs Rothschild

5. Losing control… 1st Generation Family Trust Family Business Family Business Personal ownership Structured ownership

6. Losing control… 2nd Generation Family Trust Family Business Family Business Personal ownership Structured ownership

7. Losing control… 2nd Generation Family Trust Family Business Family Business Personal ownership Structured ownership

8. Losing control… 2nd Generation Family Trust Family Business Family Business Personal ownership Structured ownership

9. Losing control… 3rd Generation Family Trust Family Business Family Business Personal ownership Structured ownership

10. Losing control… 3rd Generation Family Trust Family Business Family Business Personal ownership Structured ownership

11. Lost control… 3rd Generation Family Trust Family Business Family Business Personal ownership Structured ownership

12. Lost control… 4th Generation Meanwhile… Family Trust Family Business Family Business Structured ownership Personal ownership

13. Comments from clients; Patriarch: • Egos and personalities • Ability to separate personal and business interest • Use of third party mediators to mediate • Children too easily influenced by outsiders Next Generation: • Impossible to please dad • Unable to implement new methods or technology • Impossible to remove mum • No interest in family enterprise

14. General pitfalls • Dilution of ownership through family branches • Disagreements: • On the future of the business • On the management of the company • On the dividend distribution policy • Lack of liquidity at generational transitions • Taxation on death • Absence of successor within the family: • No heir is interested by taking over the business • No heir has the capability to take over the business • No heir at all

15. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place

16. Structures • Trust – STAR, VISTA, Purpose, Hybrid • Foundations • Family holding companies

17. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place • Family constitutions

18. Family constitution • Feeling of justice as the rule is written down and the same for all family members • Family governance tool • Records: • Family heritage, culture and believes • Family hopes and ambitions for future success • Family plan to achieve these ambitions • Mission statement for the family • Clearly states hopes and aspiration of the current and future generations • Put in place rules and a framework that engages the members of family • Set up a place (forum/council) for family members to discuss family issues • Defines the role and place of family advisors, trustee, family office, family business • Defines rights, responsibilities and obligations of each family member

19. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place • Family constitutions • Family Council v Company Board

20. Family council vs. Company board • Family council • Used to speak about the family issues, family wealth and relationship between the family and the business • All family members allowed to participate • Company management board or general assembly • Used to discuss business matters only • Only family members who are capable enough and involved enough participate Keeps degree of separation between business and family affairs.

21. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place • Family constitutions • Family Council v Company Board • Different classes of shares • Pre-emption rights or internal market within the family to sell the shares without going to external buyers

22. Different classes of shares depeding on involvment • Shares with voting rights vs. Shares without • Shares with voting rights only for certain important decisions vs. Regular shares with voting rights • Pre-emption rights • Family stock exchange

23. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place • Family constitutions • Family Council v Company Board • Different classes of shares • Pre-emption rights or internal market within the family to sell the shares without going to external buyers • Life insurance

24. Life insurance • Equalisation - liquidity to favour equality between children or one getting the shares and the other getting cash • Key man insurance • Use funds to buy out othershareholders

25. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place • Family constitutions • Family Council v Company Board • Different classes of shares • Pre-emption rights or internal market within the family to sell the shares without going to external buyers • Life insurance • Charitable ownership • Sale of the business.

26. No-one after the founder • No children at all • Charitable trust/foundation • Sale to an other company • Management buyout • No children interested in the business • Disabled/Vulnerable (minor) children

27. Potential solutions • Ownership through a trust or a family foundation with strong family governance tool in place • Family constitutions • Family Council v Company Board • Different classes of shares • Pre-emption rights or internal market within the family to sell the shares without going to external buyers • Life insurance • Charitable ownership • Sale of the family business Every family will be different and so should every solution.

28. Future role of the business founder • Any role kept? • Special advisor • Non executive director

29. Next generation involvement • Involved at an early enough stage but not to allow complacency • When the time comes, involve in the numbers • Generate interest through stories and heritage • Working at the company vs. Working outside for period • Leaving them the choice of taking other paths in life

30. Ta*x – the four letter word. • Capital gains tax on settlement • Inheritance tax on death • Income tax • Withholding taxes • Distributional tax rates

31. Example 1: Formosa Plastics Group (Taiwan) Facts: • Wang Yung-Ching (YC Wang) was the founder and owner of the group • Very successful business empire but more complicated family life: • 4 wives, 13 children, lack of sustainable family culture and values • Strong risk that the business would lack necessary stable foundations to survive after his death • Self-made entrepreneur, wanted his children to build their own wealth • Very high inheritance tax of 50% at the time in Taiwan, impossible to avoid a sale of the business in case of succession • Strong wish that the business remains and benefit the community Conclusion: • Create a charitable foundation and gift the shares, free of taxes to the new entity • Board of charity includes family members, non-family managers of the business, outsiders, with a strong purpose to develop the business

32. Example 2: Sun Hung Kai Properties Facts: • Kwok Tak Shen created the second largest property developer in Hong Kong • Before his death, transferred his 43% ownership to a trust with specific provision making the shares in SHKP non-transferable • His three sons become managers of the business after their father’s death and the success story continued • In 1997, eldest son is kidnapped, after he is released he is no longer the same and things begin to change badly • In 2008, family fight explodes in the newspaper and even more problems begin when the eldest son is removed from his position and removed an beneficiary of the trust Conclusion: trust with too rigid provisions, non-professional trustees in place, all became an additional roadblock.

33. Example 3: The New York Times Facts: • Arthur Ochs purchase the newspaper in 1896 • Transmission of 50.1% of the shares to a trust in favour of his daughter until her death with then distribution among her 4 children • In 1961 The New York Times becomes is listed on the NYSE, dual-class shares issued with the trust retaining the superior voting shares • In the 1980s, formation of 4 new trust to receive the shares of the initial trust upon the death of Ochs’s daughter • Each remain in effect for 21 years after the death of each of Ochs’s daughter 13 grandchildren • Family agreed to vote unanimously on any matter that could potentially entail the loss of its control over the newspaper → Very successful story!

34. Not just theory, nor new news. Companies with Foundation / Trust ownership:

35. Professional involvement • Proactive • Understanding • Communication • Timing

36. Questions? Paul Tucknott paul.tucknott@saffery.ch