4/2018 – Legacy issues in Chinese businesses
by Tan Thiam Hock
Saturday, 24 Mar 2018
SITTING at the Golfers Terrace outside the Main Lounge of Royal Selangor Golf Club (RSGC), one can get a spectacular view of the golf course. Amidst the tranquil ambience and scenic surroundings, one could hardly notice that just outside the gates of RSGC, the Tun Razak interchange is the most congested traffic road in Malaysia.
Celebrating its 125 years anniversary this year, RSGC is one of the oldest golf clubs in Asia, ranking alongside one golf club in India and one in Sri Lanka. All three golf clubs were built by the British where it was once a whites-only-club but since independence, the ownership and management of the clubs have been taken over by local residents.
Being a non-profit club, it is run strictly as a private member’s club, where members elect a committee among themselves to manage the affairs of the day. Club constitution and rules are strictly adhered to, hence the legacy of history is preserved and carried forward to the next generation of members.
Similarly, over the last 60 years or so, many successful Chinese emigrant businessmen in South-East Asia tend to pass their legacies and their businesses to their children. Many fathers distribute their shares in the companies to their sons only whereas the daughters will get cash and share of properties. Many a time, fathers will distribute equal shares to their sons in the name of fairplay not realising that such legacies could lead to potential conflicts that are difficult to mitigate.
I have a friend of some 30 years now having a problem with his brother over the ownership of the business that they have been managing together for the last 30 years. When their father passed away some years ago, he gave his two sons equal shares 50:50. Now that they can’t work together anymore, both brothers are in a deadlock as both refuse to sell their shares to each other. Their last resort will be to go to court for arbitration which will eventually lead to voluntary liquidation. In such cases, the court will appoint a liquidator to manage their company.
I have another friend who had a bigger legacy problem. Her grandfather gave equal shares to his four sons 25:25:25:25. After his passing, the third and fourth sons teamed up together to protest against the first and second son who were managing the family business. So it was a 50:50 deadlock situation and they decided to buy and sell the shareholdings among themselves. But they could not come to an agreement. In the midst of their disputes, the second son aligned with the third son whereas the first son aligned with the fourth. Again it is a 50:50 scenario.
So they went to court and a liquidator was appointed. More disputes followed as they could not come to a unanimous decision and they all did not agree with the way the liquidators worked. So for 25 years, their multiple lawyers and liquidators sued and counter sued and after wasting millions of ringgit in legal and liquidator fees, they manage to lift/suspend the liquidation order set by the courts.
So control of the family holding company finally came back to the family but the shareholdings among the four families remain the same, 25:25:25:25. Their only consolation is that the property assets (whatever is left) have appreciated many times in value.
My friend’s advice is not to go the legal and liquidator way unless you want to experience constant drain on your time and wallet. It is mentally too exhausting. Solve the family problems within. After all, you are still brothers in name and in blood.
After listening to both my friends’ sad stories, I might have to change my will. I have willed that upon my death, all the shares of my companies are to be divided and shared equally among my wife and three children which means 25:25:25:25. What will my children be like and how will they behave after they are married? What kind of influence will my daughter-in-law and son-in-law have over my children? Will my legacy decisions cause them distress in the future?
I will not have to worry about this problem if I am super rich like my namesake tycoon who has three wives and many children. I will assign one listed company to all the children of one wife and each child shall run his/her own company. Each child will have a little kingdom of their own to rule over. Success will be self achieved and failures will be self inflicted. Nobody blames nobody.
Sometimes, fathers have to make the tough decision of choosing one son from the brood to lead manage the family company. In the old days, fortune tends to favour the eldest son but successful entrepreneurs nowadays will choose the most capable of the sons or daughters to take the family into the next generation.
I have known of entrepreneurs who will give the majority shares to the chosen child so that he/she can manage the company effectively with trouble free opposition from his siblings.
It is not difficult to be fair when you distribute cash and properties but any decision on successor of holding companies should be based on merit and capabilities of the chosen child. It will be good if the shareholdings are structured accordingly to ease the smooth transfer of power to the next generation. A wise decision now will not cause legacy problems for the next generation.
Looks like I will have to will to my wife a bigger share so that the family company can proceed with a slight majority decision when necessary. A wise decision now will ensure that I will not get any WhatsApp messages from my wife while I am enjoying the tranquil ambience of a golf course during my afterlife.