Structuring for Family Succession Legal Aspects

Transcription

1 Structuring for Family Succession Legal Aspects CGIO Family Business Masterclass 20 October 2017 A/P Lan Luh Luh NUS Business School & Law School

2 Outline What are meant by Ownership & Control some considerations Ways of Structuring for Succession pros and cons Steps in planning for family business succession structural/legal considerations

3 Ownership and Control What is ownership of the family business? Holding on to the shares of the business entity? Deriving a constant stream of income from the business entity? Ability to dictate who you want to run the business? What is control of the family business? Managing and running of the family business

4 Business and Assets What is the family business? Business entity (usually a company/corporation) + subsidiaries + IP What are the assets of the family? Real estate property and income from other fixed assets; share investments in non-related companies etc. Grey areas? Property e.g. houses and car bought under company s name but used by family members

5 Ways of Structuring for Succession 1. Direct transfer of both ownership and control to a single person e.g. eldest son 2. Split ownership and control amongst a group of people(e.g. siblings) and bind their interests with a shareholders agreement 3. Use of Holding Company 4. Use of a Trust Structure 5. Hybrid Private Trust Company

6 Shareholders Agreement: No divestment of shares To vote unanimously in all shareholders meeting Others Split ownership + shareholders agreement 100% 40% Founder Spouse Elder son 10% Daughter Second son SA 20% 10% 10% Business Entity (Company) Employee/public 10% 6

7 Holding Company Holding Co s AA: No divestment of shares All decisions regarding BE to be resolved at HC level by majority voting. At BE s shareholders meeting, the HC will vote as a block Others 90% 50% Founder Holding Co Business Entity (Company) Spouse 20% Elder Son 10% Daughter 10% Second Son 10% Employee/Public 10% 7

8 Trust Structure Founder/Settlor transfer all legal rights to the shares to the Trustee to be held for the benefit of the beneficiaries. Trustee will administer the trust according to the trust deed and the settlor s letter of wishes Trust protector(s) can be appointed to oversee the trustee * Can be a Private Trust Co (PTC) or a Discretionary Trust 90% Founder Trust * Business Entity (Company) Spouse Elder son Daughter Second son Employees/Public 10% Beneficiaries 8

9 Pros & Cons of various structures Splitting of shares Holding Company Trust Control by family Low Medium High Control by individual High Medium Low Incentive for those involved in running the business entity High Medium Low Tax Corporate Corporate Personal/corporate Decision making Depending on majority votes HC decision depends on majority but will vote as a block on BE Made by family board/council etc. acting as trust protector Ring-fenced in insolvency No Yes (but shares in HC no) Yes 9

10 Trust Structure Trust vs Foundation Common law vs civil law jurisdiction Not an incorporated body (but see PTC) v a separate legal entity What is a Trust? A trust is set up upon a Deed of Settlement being entered between the settlor and a trustee (usually a professional trustee licensed in the selected jurisdiction), and the transfer of assets into the trust for the benefits of a single or group of beneficiaries. The trustee becomes the legal owner of the assets in the trust. 10

11 Private Trust Company Both executive and non-executive directors Shareholders Board of Directors Private Trust Company (PTC) Family member Family member Family member Licensed Trust Advisor/ Administrator/ Family Office Guardians/ Family Council Business Entity (shares) Properties Investments Trust Assets Letter of wishes from settlor/ family governance document PTC Articles of Association Class of Beneficiaries 11

12 Advantages of a PTC PTC has features of a company, i.e. corporate management, separate legal entity and limited liability, but is still a trustee for a specific family trust or trusts. But PTC can only be a trustee if each beneficiary is a connected person (i.e. family member) to the settlor of that trust. No need to appoint an external trust company as trustee to manage trust assets. The settlor to retain control in the management of underlying investments through becoming a shareholder or director of the PTC. No need for a trust business licence. But it must engage a licensed trust company to conduct the necessary checks needed to comply with any written direction issued by the Monetary Authority of Singapore (MAS) on the prevention of money laundering or countering the financing of terrorism.

13 Advantages of a PTC Singapore trust can be valid for 100 years but new trust can be created after that Only need one director to be ordinarily resident in Singapore. Settlor, beneficiaries etc. can all be foreigners. Singapore has no capital gain tax or estate duty tax. Ring fenced? Yes until the income is distributed to the beneficiary, the creditors of the beneficiary cannot come after the trust Tax implication? Since dividend from business entity (assuming it is a private company in Singapore) is exempted from tax, the share of such income that any beneficiary of the trust is entitled to receive is also exempted from tax. Foreign trust administered by a Singapore trust company is also exempted (but beneficiary not resident in Singapore or Singapore citizen).

14 Board of a PTC Like a normal board of company - can include outside advisors as directors but have slightly different committees: Strategic committee provide overall strategic and management directions regarding the trust and in particular, regarding the business entity Distribution committee decide how the income from the assets within the trust is to be distributed to the beneficiaries this can be in accordance with the letter of wishes laid down by the settlor (but if the settlor is also a director, this issue is resolved); Investment committee reviews and recommends how the assets in the administered trust are invested Others: education committee; charity committee

15 PTC v Holding Co How is a PTC different from a holding co? Profits and income from the assets in the trust held by PTC go to the beneficiaries as stated the Trust Deed and the Articles of Association and not to the members/shareholders of the company Members/shareholders should include in their wills as to how their shares in the PTC should be passed down may not be to the direct descendants Risk of the PTC being a sham if the settlors are actually in control of the assets etc.

16 Steps Draft up your Family Constitutions Family Charter/Creed Take stock of the assets of the family. Plan and consider which are to be included in the trust Family business Property etc. Investments etc. Plan who are to be included in the class of beneficiaries In-laws? Divorce? Plan who are to be in management of business Additional incentives?

17 Steps If there are more than one family involved, consider how ownership and management should be split and also how to select the best from each family to join management the Mogi family example Plan who should sit in the Family Council (more the soft skills and bringing the family together) and who in the Board also plan how to resolve conflict etc. Plan what type of professionals should be engaged to sit on the board Engage a reputable trust lawyer to set up the structure and also to act as trust advisor/administrator/ family office.

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