Family Businesses held in Trusts

Historically family businesses have been the backbone of our country’s economy. Research conducted through a nationwide statistical survey specifically commissioned for the purposes of adopting the Family Business Act which was enacted in 2016, showed that in Malta 98% of all businesses are micro, small and medium sized enterprises with the greater majority of these businesses being family run.

Unfortunately, the very nature of a family businesses, particularly the involvement of family members at different levels, exposes family businesses to certain vulnerabilities. Conflict between family members, the application of inheritance laws, the diverging interests of individual family members, and the lack of interest in continuing the business through the generations may all have a negative impact on the family business. These vulnerabilities may lead to the fragmentation of the ownership of the business or to disagreement at decision making level causing a deadlock, which would significantly hinder its operations and which may lead to disastrous consequences to the family business.

Trusts, being a long-term vehicle aimed at protecting and preserving family businesses, can be used as a tool to safe-guard family businesses from the difficulties which they face.

Can a family business be held in a Trust?

Yes, however this all depends on how the business is structured.  Typically, if the business takes the form of a company then the Trustees will be the legal owner of the shares of the operational company or of the holding company thereof.  These shares will be held for the benefit of the beneficiaries, as per the Trust Deed which is drafted at the time of the setting up of the Trust.

What benefits are there in having the family business held in Trust?

Holding a family business in Trust gives rise to the separation between the legal and the beneficial ownership of the business. With the trustee being the legal owner, it is the Trust Beed, as drafted by the settlor which regulates what interests in capital or income are to be given to the family members as beneficiaries of the family business. This would result in an arrangement where the settlor has the possibility of regulating who is to benefit from the relevant profits generated by the family business and in what amounts, be it either discretionary or fixed. Entitlements to the shares themselves and to the income generated therefrom could also be differentiated, and provision can also be made for future generations.

As emanates from a Family Business Survey conducted by PwC in 2019, while 63% Maltese family Businesses have next generation family members working within the family business at different levels, 43% said that next generation family members are not working in the business but are shareholders. Moreover, only 9% of Maltese family business have in place a formal succession plan. Succession is one of the main difficulties faced by family business. Infact it is known that many family businesses do not succeed to transfer their business beyond the second generation and this is typically due to lack of planning and lack of governance in the course of the operations of the family business.

The restructuring of a family business in a way that ownership interests are held in trust, could be the first step in formalising such a succession plan, which could also be complimented by a Family Charter or a Family Plan that would not only set-out the core values and the vision  of the business as envisaged by the founding members but also set-out rules and guidelines on family members working with the company, leadership and decision making roles and the sale of the shares or other assets forming part of the family business. Such a plan would go a long way in ensuring that as the business continues to grow and as non-family members enter the business the family business elements are not lost.

Holding a family business in trust will therefore address more effectively some of the concerns inherent to family businesses including:

1. Avoiding the fragmentation of the ownership of the family business throughout the generations as ownership will remain with the trustees, taking into account the interests of the different family members as beneficiaries;
2. Allows the profits of the family business to be used for the benefit of the family members as beneficiaries in accordance with the trust deed, taking into account their particular circumstances;
3. Allowing for the possibility of the sale of the business when required or at a certain point in time and having professional Trustees handling such process, with or without the involvement of certain family members;
4. Further segregation of the ownership of the business from its management and governance;
5. Flexibility in outlining the extent to which the Trustees, as owners, are to get involved in the decision making processes of the business or in its day to day operations.

Would the Trustees then interfere in the running of the business?

Not necessarily.  The extent to which the trustee would get involved in the management and running of the business depends on the intentions of the settlor. The Trust deed can have specific provisions specifying that the management of the company remains with designated individuals and that the trustee should not intervene in such matters.  On the other hand, it is also possible for the trustee to be involved in the management of the family business as outlined in the trust deed or in the family charter, in accordance with the wishes and the vision of the settlor, which may also include an obligation on the trustee to consult with family members or independent advisers when taking certain management or operational decisions.

Would the Family Business still qualify for benefits as per the Family Business Act?

Yes, the Family Business Act provides that a family business owned by a trustee may, subject to certain conditions, still qualify as a family business in terms of the Act, and can therefore still benefit from the incentives under the Act.