Thorough and careful succession planning is a vital element in safeguarding the future of a family business. However, even the best laid plans made with the best intentions can lead to disputes, particularly when there is a changing of the guard as the younger generations take the baton. With the right advice, the likelihood of such disputes can be mitigated if not avoided. However, if appropriate steps are not taken to mitigate them, they can cause irreparable rifts in a family and be damaging to the family business itself.
In the matter of Doe 1 Trust
In recent months, Rupert Murdoch has fought with his adult children about the future of his media empire. From the reports available, it appears that the Murdoch Family Trust was settled in 1999 to hold shares in News Corporation and Fox News. Under the terms of the Trust, Mr Murdoch's children would inherit those shareholdings in equal proportions after his death.
More than 25 years later, however, this succession plan no longer seems to suit Mr Murdoch. His now adult children have formed their own opinions about business, the media and politics, and Lachlan, his eldest son, has emerged as Mr Murdoch's preferred heir. Reports suggest that
Mr Murdoch's preference for Lachlan is not because he would like one of his children to inherit more wealth than the others but because his priority is instead focused on maintaining the current editorial slant of his media outlets; Lachlan's political views are said to be more aligned with those of Mr Murdoch than his other children. In an attempt to allocate greater control over his media empire to Lachlan, Mr Murdoch sought to vary the terms of the Trust. This was opposed by his other three children. Mr Murdoch brought an application to vary the Trust in Nevada, where (according to reports) there is i) a high degree of privacy over such proceedings; and ii) a legal mechanism in place that may have allowed him to achieve his objective, so long as he was acting in good faith and for the sole benefit of the heirs.
Towards the end of 2024, the Nevada Court Commissioner determined that Mr Murdoch was in fact acting in bad faith and only for Lachlan's benefit, and declared that Mr Murdoch was not able to vary the terms of the Trust. It is anticipated that Mr Murdoch may appeal the Commissioner's decision.
Trusts in succession planning
The Murdoch family's dispute has very high value businesses at its core, but issues around succession planning can arise in family businesses of any size. When setting up a trust in a family context, it is important to anticipate that circumstances and wishes might change. Business owners should consider at an early stage how best to balance the retention of sufficient flexibility in their succession plans with structuring that provides sufficient control to ensure their wishes are carried out.
Although they tend to be broadly similar, the rules governing trusts do vary by jurisdiction. Different courts also adopt different approaches and different procedural rules apply. The Murdoch dispute was governed by Nevada law. The following discussion is premised on English law.
Once the settlor has settled their assets on trust, legal ownership of those assets is held by the trustee for the benefit of the beneficiaries. Trustees owe duties of skill and care in the administration of the trust, and fiduciary duties to act in good faith and in the beneficiaries' interests.
Often, where there are multiple beneficiaries, and the trust is intended to be multi-generational, trusts are set up on a discretionary basis, giving the trustee a wide discretion with regard to a variety of decisions including whether to distribute trust assets (capital or income) to the beneficiaries, and whether to remove or add beneficiaries to the beneficial class of the trust.
Trusts can also be created in someone's Last Will & Testament, in order that a Will Trust arises on the testator's/settlor's death holding assets that the deceased individual only wished to pass on following their death. Because they allow for this type of arrangement, trusts are a popular option for business owners looking to plan out the future ownership of their family businesses whilst still exerting some form of control/restriction over those assets. Trusts can also be effective for asset protection purposes and can be tax efficient.
What if you change your mind?
Trusts can be revocable, so that the settlor can regain ownership of the trust assets if they change their mind. However, most trusts will be irrevocable and the settlor is deemed to fall out of the picture once the trust has been settled.
In certain circumstances, a trust can be 'wound up', for example where there are only adult beneficiaries (no children or future beneficiaries) and all of the beneficiaries agree to this. This means it is, in theory, possible for a settlor to ask or convince all the adult beneficiaries to agree to the assets of the Trust being 'called in' by the beneficiaries. However, if the trust is 'wound up' in this way, then the assets will normally 'revert' to the settlor. A more frequent scenario is that the adult beneficiaries agree to all of the assets being distributed out of the trust to each beneficiary in particular proportions and put their proposal to the trustee. If the trustee agrees, the trust assets can be distributed in the proportions agreed upon by the beneficiaries. The trustee may seek a blessing (effectively an approval) from the Court to proceed with such a course of action if the beneficial class includes any minor children, or children who are not yet born.
Instead of attempting to reverse the creation of a trust, a settlor may instead include provisions in the trust deed which allow them to retain certain specified powers. For example, the settlor might reserve the right to require the distribution of some of the trust fund out of the trust to be subject to their consent. Alternatively, the trust deed could include a power for the settlor to appoint a protector over the trust, who could monitor the trustee's activities. However, neither of these mechanisms will give a settlor total control over a trust, because they will have given up ownership of the trust assets to the trustee on the trust's creation. Control, or indeed too much 'reserved power' could result in the trust being seen as a sham, with potentially severe tax and other consequences.
For these reasons, owners of family businesses should exercise real caution if their succession plan includes trust structures.
Alternative corporate solutions
Corporate solutions can offer alternative strategies for ensuring a smooth succession while maintaining the current business owner's vision and involvement. There are a variety of ways that this issue can be approached, however below are some suggested corporate mechanisms that can be considered:
- Robust shareholders' agreements: a well-crafted Shareholders' Agreement is essential. It allows the business owner to specify how shares should transfer, potentially in conjunction with their Will, and how dividend policies should be applied. In addition, whilst disputes may be inevitable for some businesses, their detrimental effects can be significantly reduced with a well drafted Shareholders' Agreement which sets out clear parameters for conflict resolution; a Shareholders' Agreement in these circumstances ensures that all parties know exactly how disputes will be handled, which can speed up a resolution. This Agreement can include also buy/sell provisions, pre-emption rights, reserved matters and any other clauses considered helpful to protect the business and its shareholders, including to ensure effective board control.
- Different classes of shares: the strategic use of various classes of shares can offer a more sophisticated approach to succession planning. By creating different categories of shares, each with distinct voting rights, dividend entitlements, and other privileges, a business owner can tailor the involvement of their investors and successors. For example, non-voting shares might be allocated to certain family members, allowing them to share in the financial success without influencing the company's strategic direction. Alternatively, a business owner may choose to hold a 'golden share', granting them ultimate authority over specific reserved decisions, even with a minority equity stake. This flexibility in share structuring can be particularly advantageous when considering the complexities of succession.
- Involvement of independent directors: bringing in independent directors at an early stage (ie before the founder's death) can introduce impartiality and professional governance that is invaluable, especially when there are concerns about the capability of successors to manage the business effectively or if any issues around alleged capacity arise. Independent directors can contribute a wealth of experience and objectivity, providing oversight and guidance to ensure that the company's best interests remain a priority, and can be balanced alongside family members on the company's board. Their involvement can enhance the governance structure of a business during succession planning and beyond, although they themselves have to take care not to be viewed as partisan and always operate with the company's interests in mind (subject to considering the interests of creditors in certain circumstances).
- Establishment of supervisory committees: a supervisory committee is responsible for ensuring that the Board of Directors and management adhere to the necessary financial reporting standards and implement appropriate practices and procedures to protect the assets of members. Setting up supervisory committees within the executive leadership can help in overseeing the transition and ongoing management if a business owner is concerned about succession and management after they have died. These committees can be tasked with specific governance responsibilities, providing a structured approach to decision-making and strategic planning.
- Family councils: establishing a family council can help manage the family's involvement in the business, providing a forum for discussing and resolving issues related to the business and its succession. Each council will be set up with its own rules, and there is no 'one size fits all' but depending on its 'charter', family councils can function independently of a company's Board of Directors and do not have to participate in shareholder meetings (again subject to its charter). Their primary role is to provide a structured forum for addressing and resolving intra-family disputes that could impact the business. This includes deliberations on matters such as the distribution of dividends, or the future direction of the business. The council can also set boundaries and procedures regarding family members and the business, such as the proper use of company property. In this regard it can also be useful to consider whether the preparation of a formal family charter in relation to the business might provide a useful framework to set out the family's values and vision and how those are to be reflected and adhered to in connection with the business.
- Exit strategies: planning for an eventual sale or public offering can form part of a succession plan, ensuring that the family reaps the financial benefits of their investment even if they choose not to continue managing the company. Preparation should be undertaken well in advance of this to ensure that family members are all agreed prior to any exit being seriously considered, as well as detailed planning for what is to come next.
Each of these solutions has its own set of advantages and considerations. The choice of strategy will depend on the specific circumstances of the business and the family involved, and could include a combination of all/any of the above. The above should highlight, however, how crucial it is to seek professional legal and financial advice well in advance of any major life events for the business in order to explore these options and determine the best course of action for a successful succession plan to be implemented without the need to air these private family matters in a public and highly contentious setting.