A common theme in Asia is the topic of ageing founders and the corresponding issues that arise around succession. Last week we attended Taipei's AVCJ forum where it was reflected that Asian entrepreneurs have traditionally looked to pass on ownership and management of enterprises to their children. However, a founder may find that his children lack the interest or indeed the talent to take up the reigns. For these reasons the founder may want his children (or certain of his children) to benefit from his wealth but not necessarily be involved in the future of the business.
Trusts are a popular tool for succession planning. They provide for the separation of legal and beneficial interests in the trust fund, thereby providing flexibility as to how trust assets can be applied and enjoyed by a number of persons, whilst protecting against fragmentation of ownership. The Cayman Islands allows for reserved powers trusts, which are particularly useful in the family business context. These types of trusts can allow for the powers relating to the management of the business to be reserved to e.g. a management committee, so that the trustee is not tasked with the management of the business itself.
Such a trust maybe established when a founder is looking to IPO. The risk with having an individual controlling shareholder is that that person may die or become incapacitated in the potentially long lead up period to the IPO. Such an event could halt the IPO as the key voting shareholder is no longer around to exercise his vote. Pre-IPO trust structures are a popular method to mitigate this risk. The controlling shareholding can be transferred into a trust so that the shares are held by the corporate trustee but with controlling powers granted to a management committee who will vote on the IPO.
This is also an opportunity for the founder to consider how to transition his wealth to subsequent generations (and/or charities) and to potentially take advantage of lower business valuations, pre-IPO, when effecting the transfer into the trust. To keep the company's employees incentivised during the lead up to the IPO, the founder may also put aside a portion of the company shares into a trust for employees. The shares and/or proceeds of sale can then be distributed to employees at the relevant time in accordance with the tailored employee benefit trust.
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