When emotions run high: representing a warring family in a commercial deal
“$8 billion, $9billion, what comes next?”
This week on Charles Russell Speechlys Succession Watch, we look at what trustees should do to get the best possible outcome for their beneficiaries (and protect themselves) in commercial deals involving competing beneficial interests and non-commercial considerations.
Episode 1 of Succession Series 4 saw a bidding war ensue between Logan Roy and his outcast children, Kendall, Shiv and Roman, for the acquisition of family-controlled media group Pierce. It also saw Nan Pierce, majority shareholder and family representative of Pierce, hold her nerve in negotiations with the Roy family to try to achieve the best possible deal on the sale of her beloved family company.
As family representative, Nan was responsible not only for herself in these negotiations, but the wider family and shareholders; people with different financial positions, outlooks and views about the future of the company itself. And, as Episode 1 portrayed so clearly, where families and family businesses are involved, there’s also emotion. In Succession they call it the “emotional premium” that takes the value of the company beyond its usual price tag and can mean negotiations spiral out of control and at times appear to lose all commercial sense.
The horse trading of offers being exchanged in Episode 1 will strike a cold dread in any trustees or custodians who hold an interest in a family business. These could be family member trustees like Nan, who have to juggle their own values and interests with those of their loved ones, or professional trustees trying to represent a disparate group of beneficiaries.
With that in mind, here are some tips that trustees should consider if Nan Pierce’s situation feels at all familiar.
To prioritise the interests of the beneficiaries when trying to achieve the best possible deal. Trustees should take comfort that the ‘best possible deal’ does not necessarily mean the best deal from a commercial perspective, though trustees are likely to avoid criticism where their decisions make business sense and they have taken advice (see below).
Moreover, what is best for the family company may not be the same as what is best for the beneficiaries. Provided that the trustees are acting reasonably and in the best interests of their beneficiaries at all times, trustees can take account and give different weight to any number of relevant factors when making a decision (even if Succession’s Tom Wambsgans’ begs to differ; “all things being equal, the asset does have a price and it would be crazy to add an emotional premium here”.)
Identify conflicts early. Competing and conflicting interests will inevitably exist where there are family shareholdings and a group of beneficiaries. Where a trustee is also a beneficiary, or has their own personal shareholdings, then the potential for conflict is even greater. Under Jones v Firkin Flood a conflict of interests can vitiate a trustee’s otherwise reasonable decision.
It may be that conflicts can be managed simply by acting on professional advice or it may be that an independent trustee can be brought in to effectively neutralise them. Where conflicts look to be insurmountable it can be possible to get prior approval from the Court to proceed on the company sale despite the conflict (see below). Episode 1 threw up a further conflict in that Shiv and Tom, while married, were or were working for rival bidders. In such a situation it might be possible as trustee to limit the information disclosed to either of them and ensure suitable confidentiality agreements are in place.
Where there are diverging views about a company sale then it is important for the decision-maker to consult with the beneficiaries early on. Trustees need to know the beneficiaries’ views in order to take these into account on any decision and they will have an easier time of it if they can bring all the beneficiaries on board with them. Where the beneficiaries are willing to approve a proposed course of action, it would be prudent for a trustee to obtain written evidence of this (ideally a waiver of potential future claims) before proceeding.
Trustees generally have wide discretionary powers, contained within the Trust Deed and statute, but they should check that these powers include the power to sell and negotiate on the sale of company shares. If not, trustees may need to seek a variation of the terms of their Trusts. Similarly, trustees should consider the extent to which they are they obliged to look at the value of the assets they are selling, especially if there are Anti-Bartlett clauses (which limit a trustees’ duty to intervene in the management of underlying companies) which might apply.
Especially in circumstances where the trustees lack relevant expertise. In Episode 1, we saw the Roy and Pierce families supported by a team of advisors. Trustees should consider what advice is going to be needed: this could include corporate finance advice, valuations, tax advice, legal advice and, where you are dealing with a HNW family like the Roys, reputational advice. Trustees should also take into account and seek possible advice on what happens if the company sale falls through: are they faced with a depreciating asset and further family conflict? What price should they put on that?
Public Trustee v Cooper
Obtaining court approval will protect the trustees’ decision from challenge in the future. Selling a significant shareholding in a family company is going to be a momentous decision for the family. Inevitably someone will feel unhappy and will believe a better price or more favourable terms could have been obtained.
As such, the trustees may wish to obtain the approval of the relevant Court (depending on where the assets are held or the trustees are based) in relation to the company sale to protect themselves from a subsequent fallout. This could be approval obtained after they have made their decision to sell at a particular price, or prior consent to sell the family company shares. In practice, it can be difficult to foresee exactly how a commercial deal will pan out, so the trustees may want to ask the Court to approve of a range of possible outcomes.
In Nan’s case, this could be for approval to negotiate and proceed with any offer above $8 billion, and so accept a “conversation closer” (as referred to by Kendall in Succession), even if there is still the outside possibility of a higher bid. The trustees must be able to show the Court that the decision is within their powers and one which a reasonable body of trustees could have reached. They must also show that they have taken into account all relevant considerations (including the views of the beneficiaries) and not taken into account irrelevant considerations. As part of any application they must also provide all relevant information to the Court. This should include all advice received. Where there is a sensitive commercial deal involved then the trustees should consider whether to obtain privilege and confidentiality Orders.