Problems and solutions for dividing shares in a family business to heirs

Recently, there was a case study from the news of Dusit Thani Hotel Public Company Limited At the major shareholder, which was the family holding company called Chanat and Sons Company Limited, there was a conflict between the shareholders who were family members until the removal of the shareholder who was a director in the holding company and an executive of Dusit Thani Hotel Public Company Limited, including the disapproval of the company's financial statements and the appointment of independent directors.

At the same time, there was news that Mr. Charoen Sirivadhanabhakdi Shares in a holding company called Satthasap 9 Co., Ltd., a holding company with control over three companies listed on the stock exchange, namely Berli Jucker Public Company Limited (BJC), Asset World Corp Public Company Limited and Thai Group Holding Public Company Limited, with total assets of 3 trillion baht, without mentioning the ThaiBev Group, were allocated equally to five heirs.

The problem of dividing shares to heirs of family businesses is a problem that almost every business family has, which is how to divide shares to heirs and whether to divide them equally, especially between heirs who manage the business and heirs who do not.

In the book “Thai Family Business Formula” that I wrote, I mentioned the second C, which is compensation for family heirs. Should family members’ compensation in terms of share distribution or compensation be equal? And it will be a problem if there is no clear communication or agreement.

In one part of the book it says:  “Fair does not mean equal” That is, the fairness of the share division is not that the shares must be divided equally, but in the equal division of shares, the transferor of the business often feels that the descendants should be satisfied because they receive equal assets, similar to the equal division of inheritance. Therefore, it is the most difficult matter for the business owner or the inheritor.

From my work experience, I am often asked how shares or inheritance should be divided. In fact, there is no set formula for how shares should be divided among business heirs. It depends on whether those business heirs help manage the business or not, and whether the person who handed over the business has communicated with their children or grandchildren.

If business owners should communicate and have rules and regulations on this matter in legal documents such as company regulations, shareholder agreements, and family constitutions, it will be clear and will help eliminate conflicts, whether the shares are divided equally or unequally.

The study found that dividing shares equally regardless of whether a family member continues to manage the business in the future has a significant impact on the business, especially in terms of family business succession.

A PWC study found that 68 percent of family businesses with equal shares will fail to embrace digital, and only 12 percent of family businesses with equal shares will survive beyond three generations.

In addition, studies have found that equal division of business shares often leads to the following problems:

1. There are issues of corporate governance because there are no major shareholders or directors with absolute management rights, which means that decision-making may take a long time or sometimes requires consensus, which can be difficult to make in many business decisions, especially large investments.

2. The issue of compensation for dividend payments, if non-executive shareholders who do not receive dividends feel unfair, they may form a group of other heirs to take action against the executive heirs, whether it is to remove them from the board or not approve a project, which causes conflicts that are not beneficial to the company and may include cooperation to resist the executive heirs' power.

3. There is the issue of separating to do business by oneself or may agree to sell shares to the heir who can manage, which will cause a lack of unity or harmony, including being easily taken over by an outsider when it is found that the buyer, family members, have conflicts and no family members have absolute authority to manage the business (see the example of the Hermès business, which was initially gradually bought by LVMH until it had to merge and set up a holding company according to the case study that was previously written).

4. In addition, the heirs who manage the business also feel that why should they have to share dividends with the heirs who do not manage and do not share the risks or cooperate? Therefore, it is better to separate and do their own business.

According to research by PWC, 40% of Gen Z heirs are willing to sell shares to siblings if they receive a good offer, especially heirs who do not manage the business.

Divide the episodes into parts that are there, divide the episodes into parts that are not there

There are several cases where heirs will receive equal shares, such as when the business transferor divided the shares in the business while he was still alive, which is considered a gift and must be considered for gift tax. Or the business transferor made a will to give the shares when the transferor died, which may be an equal or unequal will. Or even in cases where no will was made, the inheritance must be divided equally among all legal heirs according to the law.

The recipe for success 6C and share division
Equally for sustainability

Planning the division of shares for heirs to inherit the family business is therefore a matter of utmost importance. I have written a book called “Thai Family Business Formula” on business succession and share division. If we look at the case study of Dusit Thani PCL and the Sirivadhanabhakdi Group that appears in various media, I have the following observations based on the 6C formula of the book:

1. Both families have holding companies as major shareholders with management power in the main operating companies, which is in line with the C2 structure with a holding company. However, what needs to be considered is the structure of the holding company, such as what the regulations are, how many types of shares are there?

2. In the case of Chanat and Son Company, shares were divided equally among the heirs. Khunying Chanat still holds the shares but may not have made a will to divide them among the heirs, following the law, i.e. each person holds an equal amount. Or may have made a will to give the shares to all 3 children equally. Such shares therefore caused the other 2 heirs to hold more shares in total than the heir who is the executive of the family business. Therefore, the conflict arose as reported in the news.

3. In the case of Mr. Charoen Sirivadhanabhakdi who divided shares of the holding company (Sattasap 9 Company Limited), in the future if the heirs in the family have conflicts from work, will some groups of heirs join together and cause problems like the case of Dusit Thani? However, this case may be different from the case of Dusit Thani Hotel because every heir has a separate business to look after.

Important lessons

• Family businesses require the controlling shareholder to make business decisions, reducing conflicts and increasing agility in management through the use of a family council system, family constitution and systematic communication.
• Clear share trading and reduce conflicts from heirs who do not want to participate in management.
• Separating the roles of shareholders and executives by appointing an independent board of directors or using professional executives to act as a medium for professional communication and management.

exit

1. The determination to give executive heirs the right to manage and vote on certain matters by specifying preferred shares that have voting rights at important times more than heirs who do not manage the business, but other heirs still receive equal dividends, which must be specified in the regulations of the holding company (see the book "Thai Family Business Formula", page 108), and may consider allowing business executive heirs to hold some shares in the operating company.

2. There is communication, creating a family constitution system, a family council in managing the business and managing the family without separation. There is a Family Business Office to take care of both the family and the business. Use the family business planning principle of Parallel Planning Process (PPP) (see details in the book "Thai Family Business Formula", Chapter 2, pages 85-97)

3. There is a clear, appropriate and fair determination of compensation in the form of salary, benefits and dividends according to the criteria in the family constitution, or the shareholder agreement or the company regulations.

4. Establish a clear mechanism for trading shares between each other that is fair to all parties in the regulations or contracts between shareholders (see the book "Thai Family Business Formula", pages 110, 123-126).

Conclusion “Equality”
With “efficiency”, which one would you choose?

Equal share distribution in most family businesses may serve the justice aspect of the family dimension, but it creates vulnerability in the business dimension, in terms of governance, finance, succession, and competitiveness.

Therefore, designing a shareholding structure and management that is appropriate for each family's context is essential to ensure that family businesses can survive and grow sustainably in the long term.

Managing a family business in the modern era requires both science and art. Equal share allocation is not the one-size-fits-all answer for every family, but must be designed to suit the structure, relationships, and goals of each family to create long-term sustainability for Thai family businesses.

Applying the 6C formula, especially in the matter of shareholding structure, by dividing the types of common shares and preferred shares in the holding company (C1 - Corporate Structure), allowing the heirs of the executives to hold shares in the operating company, and (C2 - Compensation) on the determination of compensation, dividend payment policy, welfare, salary, clearly including the determination of communication mechanisms (C3 - Communication), joint business with goals, and the dispute resolution process (C4 - Conflict Resolution), the policy and mechanism for share repurchase between each other with legal documents provided in advance can reduce problems and conflicts so that the business can grow sustainably.