Entrepreneurial vision, energy and determination may be the key ingredients for initial success in starting a family business. But as the business matures, while founders may still be overseeing the business their focus must inevitably shift towards long-term value creation and generational transition.
Some 85% of the companies in the Asia Pacific region are owned by a family group and, of the top 750 global family businesses ranked by revenue, over 20% are Asia-based, with combined revenue of almost USD2 trillion.1 A 2017 study by INSEAD business school, estimated that over 30% of Asian family businesses would be going through a generational change over the next five years.2
Trusts have traditionally provided an effective structure for holding and transitioning active and valuable assets, like a family business, because they offer legal separation of the assets, a high degree of flexibility and a means to avoid the costs and complexities of probate and any forced heirship rules that may apply in the settlor’s place of domicile.
Often such trusts are combined with a Singapore Private Trust Company (PTC), a private company that is formed for the sole purpose of acting as the trustee of a single trust or a group of related trusts. This provides a mechanism for the founder to continue to make commercial decisions in respect of the underlying business in an efficient and effective way without compromising the validity of the trust or trusts. A PTC can also form the basis of a Single-Family Office.
The board of a PTC can be populated with a mixture of professional advisers and members of the settlor’s family. This enables the family, with assistance of trusted advisers, to participate in the management of the PTC and therefore in the decisions that need to be taken by the PTC as trustee. This structure therefore allows members of succeeding generations of the family to become involved in the management of the PTC in a controlled way.
The ownership of the PTC company itself is commonly overlooked when setting up a PTC. Whilst there is nothing to prevent the settlor or a family member from owning the PTC company, the most resilient option is for the shares in the PTC to be held by a separate non-charitable purpose trust. This is a type of trust that can be formed to hold assets for a purpose and without conferring a benefit on any specific person.
Purpose trusts are often used to hold the shares in a PTC when confidentiality and control issues are important. A purpose trust helps ensure that the shares of the PTC are not beneficially owned by the settlor or a family member, which could expose it to attack from creditors or create tax liabilities. Singapore does not itself have legislation that permits non-charitable purpose trusts, but it is possible for the shares in a Singapore PTC to be held by a trust in another jurisdiction. Guernsey, for example, is one of only a few jurisdictions worldwide that provides for the establishment of non-charitable purpose trusts.
The ownership of Singapore companies, including PTCs, is publicly available on the Singapore company register. However, ownership information in relation to trusts is generally not available, such that a Singapore PTC that is owned by a purpose trust in a jurisdiction like Guernsey will assist in keeping the identity of the owners of the PTC and the assets of the trust confidential.
So far, so good. But when an increasing number of family enterprises in Asia are focusing on leadership succession, not just wealth succession, it is also essential to introduce formal policies and procedures for control of and participation in the business to facilitate growth and sustainability as it transitions to the second or third generations.
There is a lot at stake during a generational transition: the viability of the business, the relationships with customers, suppliers and financiers, the needs and rights of employees and the dilution of the family’s source of income. Family businesses transitions are far more complex than non-family company successions because the controlling shareholders have personal relationships, their roles may be confused, and when more generations get involved, the potential for disagreements increases.
“When PTCs are used in the context of a family office or structuring a family business, there is a need for more of a governance imperative because the family will be evolving and you have to consider how the second and third generations are going to get along,” said Zac Lucas, a partner with law firm Spencer West – International Private Wealth. “How do we manage the business, who will be the directors and what level of accountability will they have to the wider family?”
“There may be 30-plus people in the third generation, and this is where a standard trust structure can fall apart if these issues are not addressed. If the structure is focused primarily on the first generation, there is an increased risk that powers will get over concentrated and that the family may have to go to court to find a resolution.”
Where a purpose trust is created to hold the shares of a PTC, there is scope for a protector or group of protectors to be appointed to monitor and oversee the administration. Old school ‘protectors’ were usually friends or long-term advisers of the settlor, who understood their intentions, the nature of the family and its business and who were happy to accept an unpaid role. This is often no longer the case.
“Today, protectors may find themselves subject to the OECD Common Reporting Standard or may, in non-common law jurisdictions where there is no legal concept of a trust or protectorship, find the authorities have difficulty in understanding their role and that they have no skin in the game,” said Lucas. “But if the protector has a defined role within the context of a PTC board, then they are not out on a limb.”
“The crucial aspect of a PTC is that a high level of thought must go into making sure the board of directors are representative and accountable in respect of all the beneficiaries. If the purpose trust protector, the PTC directors, and the directors of the underlying business are all the same people, then there is no accountability, and you could have a runaway train with beneficiaries being excluded or unfair distributions being made.”
The purpose trust must therefore have a broad power of variation that allows it to review and refresh practical governance of the PTC arrangement so that its directors are properly answerable to all family members. This is a way of introducing best practice corporate governance into the structure in respect of the accountability of directors – exercising their powers for ‘proper purpose’, resolving conflicts of duty or interests, company transactions, use of property, opportunity or information, and duties of care and skill.
“The PTC can also establish a committee with every branch of the family represented, which provides a social framework for the whole structure and can act to prevent any over concentration of power,” said Lucas. “In this way, the PTC begins to look and act more like a family council.”
Finally, says Lucas, while a single trust might have been tenable for the first generation, by the time of the second and third generations it will not be. The different branches of the family will need their own trusts because there is a risk that a problem in one branch, such as litigation or divorce, could affect the whole trust, or simply that the trustees find it increasingly difficult to make decisions that are in the interests of all the beneficiaries. The PTC can then serve as a platform to deal with issues common to multiple trusts.
“In Asia, many family businesses are now in the hands of the second generation while the holding structure was created essentially for estate planning purposes for the founder. If it is no longer fit for purpose, now is the time to start refreshing the structure and introducing best practice corporate and family governance. At the end of the process, you will have a much more robust structure that can anticipate and respond to change,” concluded Lucas.
1 From The World’s Top 750 Family Businesses Ranking, a 2020 survey, based on annual revenues, of the top 750 family businesses globally. Published by Family Capital and compiled in conjunction with PWC.
2 From The Institutionalisation of Family Firms (from Asia-Pacific to the Middle East), a 2017 INSEAD report produced by the team at the Global Private Equity Initiative (GPEI).