It’s trite to say that succession planning is about so much more than simply writing a will.
For the many of you that have family trusts, self-managed superannuation funds, corporate trustees and stand-alone investment or trading companies, much broader considerations arise with a view to achieving an appropriate balance in the future control of those entities.
To illustrate, let’s assume there is a private investment company, the shares in which are held equally between brother and sister. Both siblings are directors. What then happens to control of the company when one of the siblings dies and the survivor is left as sole director? The deceased sibling may pass on their shareholding to their children, but a 50% shareholding won’t be enough to assure those children a seat at the board table. Generally, directors are appointed by the shareholders in a general meeting by simple majority (i.e. greater than 50%).
This situation can be addressed by amending the constitution of the company to enable each shareholder to appoint and remove their own director. A director’s voting power can be tied to the number of shares held by the appointing shareholder to maintain balance. You might also hardwire into the constitution a minimum threshold of directors and ensure that that threshold is unable to be changed except by special or unanimous resolution.
If there is a concern around the size of the board becoming unwieldy, you might consider establishing different shareholder classes for each family group and investing the right to appoint and remove a director in each shareholder class, rather than in each individual shareholder.
If you have a private company that is the trustee of a discretionary family trust, there are additional matters to consider, armed not just with a copy of the constitution of the company, but also the trust deed and all supplemental deeds of variation and/or appointment.
To illustrate, say mum and dad own the shares in a trustee company equally between them and hold the controlling positions of appointor and guardian jointly. Mum and dad want to pass control of the family trust to their three children when the last of them dies. Often, this is done by leaving the shares in the trustee company equally between the children and passing on the controlling positions of appointor and guardian jointly to the children. However, this could lead to inequity.
Standard company constitutions generally provide for most decisions at director (and shareholder) level to be made by simple majority, which leaves scope for the minority to be overlooked or treated less favourably (at least insofar as decisions that don’t require guardian consent are concerned – assuming the trust has a guardian). This is where a special purpose constitution can assist. As well as entrenching the right of each shareholder to appoint his or her own director, it could require that certain important trust decisions (e.g. capital distributions, or income distributions other than equally between the children or their related entities) be made unanimously or alternatively by a special majority rather than simple majority. It’s always a fine balance between protecting against majority oppression on the one hand and minority disruption on the other.
A special purpose constitution for the trustee of a self-managed superannuation fund is also worth considering because no matter how solid a binding death benefit nomination you put in place, whoever ends up in control of the fund when you die can still cause disruption. Successor director provisions should be considered to ensure that when one member/director dies, their legal personal representative will step into the role of co-director as soon as a grant of representation in the estate is obtained.