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Many family businesses wrestle with matters of ownership and control – how should the family shareholders control, or influence the running of the business? How do you manage relationships between family members in the context of the business? How can family members ensure appropriate access to information on the business without “interfering” with day to day management?
Answering some of these questions may be straightforward with a first generation family business. The family members that own the shares will usually sit on the board of directors that control the day to day operation of the business. Even then, if there are several family members owning shares and sitting on the board, matters of control and decision making can be difficult to deal with.
But where the business is owned by the second generation or beyond, the gap between the owners of the business (family shareholders) and those that manage the business (directors, which may or may not include the family) often widens.
It would certainly be surprising if all directors were always family shareholders. The engagement of external senior management is often crucial to success. Likewise, the wider the share ownership is held, the less likely it is that all shareholders will be directors. Boards can become overly cumbersome if all family members take a seat.
However, family shareholders are still stewards of the business and will want to feel that they are listened to, and have some kind of influence, even when they recognise that are not necessarily the best people to manage the business on a day to day basis. So what can be done?
Shareholders can choose to simply rely on their voting rights as shareholders of the company. But often the exercise of such rights will be limited to AGMs, and the matters voted on at AGMs may be quite limited. Of course, shareholders can appoint and remove directors to represent their views, but only if those wishing to do so carry sufficient voting control, or their shares carry special rights to appoint representatives.
Some families form ‘Shareholder Councils’. The family might appoint, formally or informally, the members of the council (who will, therefore, be a subset of the wider family) and the Shareholder's Council will represent the family in dealings with the Board. This provides a valuable link between the shareholders and the Board. Ultimately, however, the Shareholder’s Council is usually (although not always) a communication forum and often will have no legal rights over and above the rights of the shareholders from whose ranks they are drawn.
One option that takes the Shareholder Council concept further or provides an alternative structure to create a greater sense of involvement and influence, is the use of a Family Holding Company.
The Board of the Family Holding Company is akin to the Shareholder Council – appointed by the family shareholders in the normal way. This is a more formal mechanism for representation underpinned by Company Law.
The Family Holding Company then becomes sole shareholder in the operating company or group. As sole shareholder, the Board of the Family Holding Company would be in control and could exercise that control by appointing and removing directors, by convening shareholder meetings and by setting the agenda for the AGM of the Operating Company. This has the effect of consolidating the power of all the individual family shareholders within the Family Holding Company Board.
The Family Holding Company could also hold other assets, interests or investments of the family (always being careful to consider Business Property Relief, of course!) allowing the family to evaluate and control all their assets together.
It can be quite easy to insert a Family Holding Company above the existing family business Operating Company, without triggering any tax liabilities although advice should always be taken.
There are additional obligations of course (e.g. the legal obligations attaching to all directorships and possibly accounting/audit obligations that would normally sit only on the shoulders of the Operating Company Board). But these obligations should be manageable and often a price worth paying for the increased level of effective influence and control.
Of course, a Family Holding Company wouldn’t be appropriate in all cases, but they can be very helpful in the right family circumstances.
Lizzie leads Deloitte's Private South West and Wales practice with extensive experience working with private companies across the spectrum, including start up/ scale up, PE backed and family owned businesses. Prior to moving to the Bristol in 2018, Lizzie led the Tax team in Cambridge for 8 years and before this worked for 9 years in Deloitte’s London office, specialising in advising Private business. Lizzie specialises in advising privately owned and family businesses, as well as individuals, families and business owners. Her tax capabilities span corporate, personal and shareholder tax, with particular expertise in the field of transactions, including demergers, acquisitions and reorganisations. Further areas of tax expertise include Business Property Relief and succession planning. Lizzie has significant experience in assisting companies as they prepare for IPO and is one of our specialists nationally in this area. Lizzie also sits on Deloitte’s UK Private Tax Executive.