Horacio Vianello
BC F PZ Abogados, Buenos Aires, Argentina
hvianello@bcfpz.com.ar

Session Co-Chairs

Dinka Kovacevic
Kovacevic Prpic Simeunovic Law Firm, Zagreb, Croatia; European Regional Forum Liaison Officer, Closely Held Companies Committee

Nicole Van Ranst
Newton Law, Brussels, Belgium; Vice-Chair, Closely Held Companies Committee

Speakers

Jérôme Barré
YARDS, Paris, France

Dinesh Melwani
Mintz, Boston, Massachusetts, United States; Communications and Publications Officer, Closely Held Companies Committee

Philip van Hilten
AKD NV, Amsterdam, the Netherlands

Introduction

Family businesses often look to the next generation to run the business. However, the next generation is not always prepared or qualified to take over, or there may be several members of the next generation involved. Or it might be that the retiring generation needs cash from the sale of a family business to retire comfortably.

An increasing number of investment funds invest in family businesses to facilitate succession. There are several aspects to the issue of exit strategies or liquidation of the shareholding of family businesses. Not only the family dynamics, the interests of the investment fund which invests in view of a return on their investment and the perspective of the (founding) shareholders’ long-term goals which need to be aligned. Are there appropriate mechanisms which would cover such contradictory interests? In this session, the panel discussed the standard clauses used in practice as well as examples of how such legal solutions reflect particular situations in practice.

Report

The session had an audience of several dedicated Committee members as well as participation from Christian Hoenig, Paul Josephus Jitta, and Noreen Weiss, who each added interesting points to the discussions.

Innovative as always, the session began with a short from the animated television series Family Guy (season 20, episode 14) parodying the TV series Succession, a show which brilliantly satirises some of the aspects of family companies handing control to the next generations and the related family interactions in achieving such an outcome.

Session Co-Chair Nicole Van Ranst introduced the session with much enthusiasm:

Family-owned businesses never cease to fascinate us, as the family intrigues make for great entertainment. Over the centuries, the name and fame of family businesses has been perceived form different angles. Some claim a family business is the equivalent of a conservative, small ‘mom and pop shop’, informal – in other words, not a professional venture. Others will claim that family businesses have a long-term strategy, something they like to refer to as ‘continuity’. Even today, family-owned businesses account for a major part of the economy. But how do family business prepare themselves for this eternal, long-term life? The topic of family-owned businesses is a vast one. In this session we will discuss what a family business is, and how family businesses can thrive for several generations.

Session Co-Chair Dinka Kovacevic introduced the speakers, comprising the following distinguished professionals:

• Philip van Hilten (Amsterdam, the Netherlands) is a partner at the Benelux law firm AKD and has vast experience of family business matters, advising international family-run businesses on issues relating to structure, governance, asset protection and multigenerational planning. Philip is also the Dutch Managing partner of No More Worries, a family governance boutique based in The Hague, and has also been an active member of the IBA since 1980. He has been a member of the IBA Energy Section board, chaired the Tax Committee for many years, and was a member of the IBA Council. Internationally, Philip is regarded as an ‘elder statesman’, capable of finding solutions for many complex situations.

• Jérôme Barré (Paris, France) is an attorney-at-law at Yards Law Firm in Paris where he leads the Department of Private Wealth and Family Companies. He is also Chair of STEP France, and a member of the board of AFFO (French Family Office Association), where he is in charge of its Tax and Legal Committee and directed the publication of the White Book on Family Governance. Jérôme was formerly a partner at Arthur Andersen Legal, and was the Tax and Legal director for Rothschlid & Co, looking after the Rothschild family, the private clients and M&A activity, where he created and developed the private wealth department. Before such postings, he was the tax director for Crédit Mutuel Bank and tax director for AXA group, where he started his activity as a lawyer. Jérôme also teaches tax in Master II in Paris Dauphine, Paris Assas and Paris Descartes.

• Dinesh Melwani (Boston, Massachusetts, United States) is a transactional attorney and is a partner and co-chair of the Mintz International Practice. His practice encompasses M&A transactions, strategic investments, entity formation, and angel, seed, and venture financings. He lectures on these topics at MIT’s Sloan School of Management, The Broad Institute, MassChallenge, and The Capital Network. Dinesh serves as a strategic advisor to US and international clients in an array of corporate transactions in the technology, healthcare, life sciences, and energy sectors. Dinesh’s practice also includes a broad range of other sports and entertainment related work. Earlier in his career, Dinesh was seconded to Tokyo, Japan. His significant experience in India and Japan has provided Dinesh with valuable insight into the nuances of Indian and Japanese business culture and negotiating styles.

The Co-Chairs introduced themselves:

• Nicole Van Ranst (Newton Law, Brussels, Belgium) is the Vice-Chair of the IBA Closely Held Companies Committee and a corporate M&A partner at Newton law, a Brussels law firm. She has a career as an M&A lawyer, mainly for family-run businesses. For a few years, she was rolling out the buy and build M&A strategy of one of her clients, a leading Benelux sports and life entertainment family-run business. She is a certified family business advisor, and also acts as non-executive member of a family-owned and family-managed company and a business angel investor.

• Dinka Kovacevic (Kovacevic Prpic Simeunovic Law Firm, Zagreb, Croatia) is the European Regional Forum Liaison Officer of the Closely Held Companies Committee and a partner in Kovačević Prpić Simeunović (KPS) Law Firm, Zagreb, Croatia. She has worked in various fields of corporate law, finance and banking, project and asset finance, energy law, competition law, public procurement, and employment law. She has also acted as legal advisor in a number of relevant transactions, including several bank privatisations and M&A projects in or concerning her jurisdiction. Dinka has supervised and conducted legal due diligence in the acquisition of a betting enterprise, television broadcasting company, projects related to renewable energy, among other sectors. She has lectured on financing of energy projects in distinguished entities in Austria, Croatia and France, and also published articles in the European Energy Journal. Dinka has been an Honorary Legal Advisor of the British Embassy in Croatia for the past decade.

Of the topics covered by the session itself, the first discussion evolved around how to define ‘family business’, as geographical and cultural differences in perception of family business are applicable. In brief, Jérôme began by defining the term, as ‘a business managed by a family but with nuances’. Philip stated that we all have a different definition of this concept, as ‘family business depends on the perception of the client, as the company might be perceived as controlled by the family’. Moreover, Dinesh argued that a family business is a venture in which part of the high level decision making is not stated on stakeholder documents, as usually there is some sort informal governance among its members. Jérôme added to this point, explaining about the presence and relevance of affectio familiaris at such ventures, and the sense of belonging that such a concept brings to the business’s participants and to the generations that follow.

Philip mentioned the historical perspective of the German Aktiengesellschaft (AG) company and the Dutch Naamloze Vennootschap (NV) company, stating that it is not about the number of participants of a company that defines a family business, but it lies mostly on the affectio familiaris. Dinesh expanded on the governance aspect as a definition of family business, as if written or customary, there is one individual who steers the decision process.

Jérôme presented examples of the historical evolution of family business and family-run enterprises, and how much the decision process is more mature, and the sophistication of the management currently achieved. This comes about especially through education, and even with declarations of intention from the family in order to avoid mishaps in the management of the business, which are unforeseen events.

Dinesh talked about exit (selling out) strategies, as the decision power is passed from the family to the buyer, and the emotions involved in the process, due to the affectio familiaris. Generally, there are affiliation and/or affinity considerations, including name, that would be part of the goodwill of the acquired venture and the role that the company must fulfil after acquisition. Consequently, the process takes extra delicate protection steps in order to have a transition and surrendering of the brand, licence or business to the buyer, usually an outsider. To exemplify this point, Jérôme mentioned the story of an applicable family business in France, which invited members of the naming family to be part of the business, as they perceived the affectio familiaris to be an added-value to the enterprise and the performance of family members acting as executives.

Philip recounted his experiences on transition strategies, specifically for passing and handing-over control of family business to the next generation, a process that must be individually tailored for each enterprise and family. He stated that transitions are necessary for the perpetuation of a family’s company, and the timing and scope of the transitioning plan is vital for the success of the transition. He outlined some examples of successful and failed transitions.

Philip and Dinesh highlighted the importance of the intersection between tax planning and transitioning plans in order to maximise tax efficiency and secure the continuity of the family business. Jérôme examined the matter of transition and the role of family members, such as those caring the surname relating to the company, in the management of the company and the integration of upcoming generations in managing the company, if an exit operation is not carried out.

The audience of such interesting and entertaining session actively participated in the debates. Christian Hoenig (Wolf Theiss, Vienna, Austria) asked the panel an interesting question: ‘Is the best solution [for the transition strategy] a shareholders’ agreement? How many families did you managed to convince to achieve such agreement?’

Dinesh made a differentiated between a shareholders’ agreement in the context of a family business, as some other maybe non-binding documents may be relevant, and it should be considered a sort of family chart. Phillip mentioned how to ascertain if the upcoming generation is fit and well-educated to take over the business. Jérôme expanded on more of the definition of family, role of in-laws and the decision power distribution among family members, and stated correctly that the key for success is communication.

As a milestone on the session, Nicole mentioned that communication is relevant but a family argument on the corporate environment may not be so productive. This should be avoid with due and careful planning and with the definition of roles carried out by the family members.

Another officer of the Committee attending the session, Noreen Weiss (Gunnercooke, New York, US) suitably argued about the importance of keeping the upcoming generations within the family business, especially if some of the children decide to take a different career paths. She asked the panel: ‘Should you buy them out of the family business?’ Philip again emphasised the importance of the definition of family, with a due process, one-on-one interviews and planning efforts. As the patriarch or matriarch usually regards the business as their legacy, their mausoleum, such the decision power held by them would leave their hands and pass onwards, which might be an issue of conflict.

In addition to this point, Jérôme mentioned the importance of supporting, financing and planning for the family members who do not wish to take over the family business, in order to foster communication and freedom among family members, for the benefit of the business. Dinesh mentioned that he has come across cases of family companies becoming public to avoid family arguments and achieving public status, part of the family managing the company buys back control of the business. Jérôme added that it is cheaper to help a family members on their side project than having to buy them out.

Philip developed the themes of the family chart, the interviews with the successors, and the tailoring process of drafting of such a family agreement, as crucial factors in order to avoid further conflict and plan a successful transition strategy. Philip and Dinesh mentioned the role of outsiders brought into family companies to guarantee continuity. It is not just a case of competence, as an outsider can have an active role of mediator and a contention for the family members running the business.

Another audience member raised a point on fiduciary duties. He also asked: ‘as a family-owned business is listed as a public company, is failing a transition process a failure of the discharge of fiduciary duties of the board member and directors?’ Dinesh responded by making the distinction between fiduciary duties, as a legal requirement, and transition strategies as a means of perpetuating the family business and fostering its success, while safekeeping it for future generations.

Committee member, Paul Josephus Jitta (Buren, Amsterdam, the Netherlands) posed a key question to the panel: ‘How do you deal with the next generation’s intention to change the direction of the company?’ Dinesh stated that maybe the best solution is to embrace the different direction, and work with them to established clear and effective criteria on the financing, participation, and possible outcomes of such enterprises or different directions.

This rapporteur, also a Committee member, Horacio Vianello (BC | F | PZ Abogados, Buenos Aires, Argentina), said that his main impression from the session was the one mentioned by Jérôme, that ‘it is cheaper to help the upcoming generation on the new direction than having to buy them out’. He continued, stating that achieving such a position is an active indicator of successful communication between the family members, be they the current ruling generation or upcoming family talent.

Philip mentioned the importance of planning, not only for the protection of the business but also for legal considerations, and also in Sharia law in some jurisdictions, as restrictions on successions might be applicable.

Among the session’s closing statements, Jérôme recounted that one of France’s largest family businesses wished to have a family member go back into the business, but none of them wanted to. Therefore, management might need to have a forceful role in helping family business to remain in the contact with family members, as that strength deriving from affection familiaris could be beneficial for the business.

Concluding the debates, Nicole skillfully summarised that the foundations had been set for future discussions on family business in future sessions at IBA Annual Conferences, and the entrepreneurial conferences chaired by the Committee, as the roles played by lawyers connected to family business clients goes beyond the legal practice.