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Family Investment Companies

View profile for Lizzie Walters
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It is often a frightening concept to give away hard-earned assets and lose control over them and this, together with concern over future cash flow, can be a barrier to putting assets into trust or simply making gifts. One of the key benefits of a family investment company is that wealth can be passed down the generations without losing out completely and whilst still retaining control, but it is important to make sure the corporate documentation backs this up. The founders must remember that the family investment company is designed to be a long-term investment vehicle and this is their opportunity from the very start to dictate how matters will be handled even when they are not around.

Transfer of Shares

If an individual is giving away some of their wealth to their children, they are unlikely to be happy to lose control over where that wealth ends up. Giving this some thought at the very beginning will avoid potential problems later on and restrictions can be put in place to make sure that a shareholder cannot just transfer shares to anybody. Restrictions are important during the life of a shareholder. Without such provisions, the family is at risk of shares (which may give the holder any combination of voting rights, rights to income and rights to capital) being passed to somebody outside of the immediate family and onwards. However, they are also important on the death of a shareholder. The family cannot control what somebody puts in their will, but they can make sure that it cannot be put into effect if it does not correspond with the family’s wishes. Without these provisions being carefully thought through and added to the company’s articles of association, shares may well be vulnerable on divorce, bankruptcy or just a falling out. 

Conversely, the founders may wish to make sure that they are able to transfer shares freely without the consent of the other shareholders so that they are able to gift shares to different family members at their own discretion. This is again something that can be added to the articles of association giving the founders comfort that their wishes will be carried into effect. 

Share Rights

At its simplest, a company may have one class of shares with equal voting, dividend and capital rights and, for many families, that works perfectly well; but there may also be other factors to consider. The founders may want to retain absolute control of the company and so it may be appropriate to create classes of voting and non-voting shares. Equally, there may be clear ideas as to who should receive dividends and where the capital value should sit. Considering these issues at the beginning is essential and the rights must be set out in the company’s articles of association. To change the rights later down the line can result in a hefty tax charge and may rely on the support of the other members. Setting the company up with one class of shares may be easy, but as shares pass down the generations, the founders may not be happy that their voting control has been lost and so it is important to remember that one size doesn’t fit all.

Decision-making

Linked to share rights, the founders need to consider where control should sit. As with any company, the directors will be responsible for the day-to-day running of the company, but where the founders have transferred more than 50% of the shares to their children (which may well give the best outcome for estate planning), it is their children who have the ultimate control over who the directors are. This can be combatted by building in the right for the founders to be able to appoint directors, where such right can pass to their personal representatives or attorney, and they may also be allowed a casting vote to ensure control, but it will be too late to add this in when the voting control has been given away.

Whilst setting up a company is easy and there are many “off the shelf” products around, as with any company, it is important to get the documentation right or the desired aims may not be achieved. This is even more important with a family investment company where frequently many generations of the family are involved, some of whom may have limited experience in running businesses, and where the founders often have a vision in mind which may continue after they are not around. What works for one company may not work for another and it is important for the founders to get it right from the outset so that they have peace of mind that they have properly catered for the next generations.  If you would like to discuss your options please contact a member of our Corporate Team.