Family business succession in Asia - legal insights

Forward-looking family businesses have demonstrated remarkable resilience around the world, empowering them to weather market volatility and commercial shifts. These enterprises have not merely survived but thrived.

A common trait among these businesses is the founders’ foresight for strategic, long-term planning. This includes diversifying revenue streams and segregating business operations to facilitate efficient succession by future generations.

Such planning allows subsequent generations to maintain the founders’ core values and continue their legacy. It also lays a foundation for future generations to not only preserve the family wealth, but also expand the business.

Mabel Lui, Head of Greater China Commercial at Withersworldwide, an international law firm, says that a family enterprise’s key feature is ‘by the family, for the family.’

Mitigating family disputes

Family relationships’ complexities can sometimes spark rivalries among family members. Many prosperous family enterprises acknowledge the importance of mitigating these conflicts by dividing the family business among different family members. This strategy minimises potential disruptions and damage caused by sibling rivalries. Lui notes, “Business segregation is potentially more effective in ensuring the family business’s smooth development than any written rules.”

Before succession becomes a necessity, these enterprises will start preparing the next generation to take the reins. This approach ensures a seamless transition and allows ample time for training and mentorship. Nearly all family enterprises in Hong Kong have implemented early succession planning. This strategy results in the second or third generation participating in and receiving training from the family business, eventually assuming leadership.

Lui notes, “Many successful businesspeople involve their children in the family business while maintaining control, offering business guidance and oversight, and instilling the family’s core values and culture. Even after passing the baton, they continue to provide advice and support, ensuring a smooth leadership transition.”

Governance, legal enforceability and tax

It’s recommended that a family enterprise establishes a family governance structure before approaching succession. The governance framework signifies the shift of decision-making from the founder alone to a collaborative and collective process among family members, according to Lui.

Family members should be briefed on shared values, a common mission, and a collective vision for the future. Family governance helps manage wealth, define roles, set boundaries, and balance competing interests.

“Family governance is a good starting point,” says Lui. “It provides a framework for regulating family affairs. Members with a shared goal of preserving the family’s wealth can voluntarily comply with it.”

However, unlike commercial contracts or wills, family constitutions and governance rules are not legally binding unless they incorporate consideration in the legal sense. “These documents should include compliance measures, restrictions, and clauses outlining the repercussions of non-compliance. It’s a highly complex exercise,” she adds.

Picking the right legal tools

Daniel Tang, a partner at Withersworldwide in Hong Kong, emphasises the importance of legal enforceability for seamless generational transitions, especially when the transition is implemented by changing shareholders or directors in corporate vehicles. “This necessitates a legally binding document that explicitly outlines the mechanisms and sections detailing how various stakeholders can exercise their rights within the family holding vehicle,” he points out, adding that considerations for prenuptial and postnuptial agreements are also vital components when the children get married.

Fast evolving landscape

A rising number of ultra-high net worth families are establishing family offices to handle their affairs, primarily dealing with wealth and asset management, succession and legacy planning, tax and legal matters, public reputation management, and philanthropy. In Asia, Singapore and Hong Kong are preferred by many families as the headquarters for their family businesses.

Both cities have rolled out various incentives to lure more family offices to set up in their region. For example, the Hong Kong government recently enacted a bill offering profit tax concessions to family offices, supplementing other incentives that have already drawn high net worth individuals to establish family offices in the city. These incentives include a profit tax exemption for family-owned investment holding vehicles (FIHVs) managed by single-family offices.

However, the landscape is rapidly changing. In Hong Kong, tax revisions have been made, such as the 2023 Amendment Ordinance to the foreign-sourced income exemption, which took effect in early 2024. “Many family businesses use offshore holding structures for their investments,” says Tang. “These investment holding schemes are increasingly scrutinised internationally by regulations like the OECD’s Common Reporting Standard for foreign-sourced income. It poses more challenges for families to comply with all requirements while maintaining a tax-efficient structure. That’s where professional advisors like us come into play.”

Each family’s unique characteristics necessitate a ‘bespoke’ legal advisory package for strategic, sustainable planning. “We delve into the client’s family values, which guide their business,” says Lui. “We then participate in decision-making, be it legal or commercial.”

"When advising on a family company's tax matters, for example, we will involve our private client and tax team, which is well-versed in family wealth planning matters and relevant tax considerations, and a corporate lawyer who efficiently handles corporate commercial related areas," adds Tang.  

First published by South China Morning Post on February 26, 2024