Many people think the family business is an easy ride. You are surrounded by the finance and support of your blood relatives, surely nothing can go wrong? Make sure you look hard before you leap and have a lawyer by your side.
Family business is all about generational wealth creation and protection leading to succession. There are many great family businesses in Africa. One of them is worth billions of dollars through three generations of hard work and hails from East Africa.
You may have heard of Mohammed (Mo) Dewji, who made his name as Africa’s youngest dollar billionaire. He is the CEO of MeTL Group, Tanzania’s largest homegrown company with billions in revenue, employing more than 24,000 people and operating in 12 countries in Africa.
The MeTL Group was started in a small hut by his grandmother who was a trader. It was carried on by Mo’s father, Gulamabbas Dewji, who turned it into a thriving import/export business. Mo joined his father in the business in 1999, after studying business at Georgetown University and he turned it into a manufacturing giant. It is now one of the largest industrial conglomerates in East Africa, with interests in trading, agriculture, manufacturing, energy, petroleum, financial services, mobile telephone infrastructure, real estate, transport, logistics and distribution.
To grow successfully in business from one generation to the next like the Dewji family, structures need to be in place early on.
Deborah Mutemwa-Tumbo, an Attorney of the High Court of South Africa, co-founder and CEO of Tumbo Scott Inc, a Sandton based full service corporate and commercial law firm, says the main objective of any business is to create profit, but for family businesses, all objectives and business visions need to be made clear in order to see sustainable generational growth.
“The reasons why the family is getting into business is something that the family needs to decide from the onset in a customized Memorandum of Incorporation,” she says.
Although the Companies and Intellectual Property Commission provides a basic Memorandum of Incorporation on its website, Mutemwa-Tumbo warns that it doesn’t account for different business considerations like shareholding, voting rights, minority shareholder protection rights, majority shareholder protection, dividend policies and much more. These are key protections for disputes, or when the family wants to partner with outside investors to grow the business.
“When issues arise you know they aren’t dealt with in an emotional way. You know the resolutions are dictated by the incorporation documents of the company,” she adds.
The differentiation between a shareholder and the person running the business is also key. Family members can run the business as directors of the company or employees of the company. They can also just be shareholders and hire an outside CEO.
“I often advise my clients to put a shareholders agreement in place and a memorandum of understanding to ensure that their rights are fully protected as individual shareholders of the business. It’s all good and well, when the business is starting, and everybody’s on the same page; but sometimes when disagreements arise, it’s helpful to have mechanisms that govern the shareholding or the ownership of the business,” she says.
Just because a founder started a family business, it doesn’t mean that all their children have a stake. The rules of a private company, with limited liability state that shareholding is static. It’s ownership is based on an individual. In a family business there is more than just merely setting it up. It moves beyond the ownership of a business and towards the protection of assets.
“Shareholding is seen as an asset based on an individual. If you want to protect it beyond those individuals, one structure that we often advise our clients to put in place is a Trust,” she says.
This has been used for many years.
“If you think about some of those Stellenbosch family wine farms that have been held in the family for generations upon generations, you often find that it’s actually held to a specific trust as opposed to a certain individual. Let’s say for example had they been held by one specific individual that would have wanted to sell the farm. But if that property is held in a trust, and the rules around how the property is managed are quite clear, then that serves as a mechanism to protect the family assets,” says Mutemwa-Tumbo.
The Trust would hold the shares in the private company for the beneficiaries and all the dividends will be paid out by the Trust to nominated individuals, for example, the blood relatives of the founder.
“During the setup phase of the business, a trust deed will be put in place. It will essentially talk about the distribution of the trust assets for the benefit of the beneficiaries. You would give a broad definition of beneficiaries to say the beneficiaries of this trust are the founder and all the blood descendants of the founder for example.”
If you aren’t clear from the onset, you run the risk of having to amend the Trust which is a lengthy, expensive and tedious process.
“The registration of a trust is something that needs to go through the master of the High Court and any amendments to that trust deed will need to be done through the Masters office,” says Mutemwa-Tumbo.
In addition, just because someone is a shareholder in the family business, it doesn’t mean that they should be actively involved in day-to-day decision making.
“The companies act number 71 of 2008 is very clear on the duties of directors. It’s very clear that they must always act in the best interests of the company, and not of the shareholders. So when there’s a conflict between the company’s interests and the shareholders’ interests, the company’s interests are paramount for those that are running the business, that being the directors,” says Mutemwa-Tumbo.
It should also never be automatic for a family member to be a part of a family business.
“It really all goes to what’s in the best interests of the business; what’s in the best interests of achieving the objective of generating a profit. If they have no skills to contribute towards the achievement of the family business objectives, then it can’t be justified for the director to give them a role.”
It’s true that family businesses can be strong, secure and long lasting but they are not without pitfalls and a lawyer is as essential to you as a relative.