Todays Hindustan times talks about the JSW-JSPL deal getting stuck because of the terms of the family charter and valuation and the terms of the buyout.
While not specifically commenting on the deal in particular, there is a very interesting issue that this raises, that is, what if the family charter states something which may run into legal road blocks? Or even not permitted by law? Furthermore, how does one comply with an agreement to take care of each other and come to each others help, in case of need?
This becomes particularly acute, when the family or personal wealth is tied up in the companies, usually listed. Any help or funds transfer would be subject to various compliances and legal approvals.
The regulators, investors, or institutional shareholders, who form the largest group of shareholders today, may not agree that such assistance may be in the best interests of the company, even though it may be a moral obligation or a requirement under the family charter, for the promoter to do so.
This also raises the concept of fairness and trust, since these roadblocks could have the potential for blowing up into a much bigger mess, as the weaker side may think of these as excuses to avoid helping out.
The additional risk for governance since this could affect the long term reputation of the helping company, as it may risk its credibility in the financial markets. There is always the doubt, on the extent, duration of the assistance in the future and implications on the health and long term viability of the helping company, if this assistance were to continue in the future.
There is also the probability that the stronger company may have to divert its investment plans to help out and thus jeopardise the operations of the healthier company.
All these will have long term implications on both the family and the business. What can be done to prevent this?
While it is not possible to prevent or forecast all eventualities, families could consider some of the following to safeguard themselves:
Separate out business assets from family assets:
Most family wealth historically, has been in the form of shareholdings in the company and all expenses are borne by the company. There is very little in individual names except what was perhaps required for tax planning purposes. A financial separation of the wealth becomes extremely important as it creates a financial security for the individual family members outside the business.
Build a portfolio of assets in an individual capacity:
This leads to the next issue wherein the individuals have joint shares in various projects, properties, assets without much clarity of the exact shares of each member. It would be a good exercise to clarify amongst family members, as an annual spring cleaning exercise to revisit these so that the family has a fairly good idea of the assets and the individual shares.
Having a pool of liquid assets outside the family business:
I cannot over emphasise the importance of this point. There have been cases where all the assets are highly illiquid and may not be available, should a contingency arise. Any wealth advisor can plan this out for you depending on your lifestyle.
Consider a family pool of liquidity for funds:
Some families have started doing this, each one deploying a small sum which can be collectively used for the family in case needed. This reduces the need for each one to maintain a liquidity for each family division.
Have an informal family meeting with internal family members periodically, once a quarter, if not monthly.
Communication builds up trust and strengthens the relationship between all the members. Regular communication would also reduce any conflict, if the relationships have been strong. You cannot build a relationship in a day, and this would help in times of stress and duress. This has the additional benefit of knowing the people and hence even if there is a delay due to legal compliances, the family is still together.
Compliance in Spirit or the Letter of the family agreement.
There has been a lot of heartburn on this issue, that is, whether an agreement has to be followed strictly or to understand the intention behind the agreement and to honour that. Most family agreements have a fairly large amount of emotion behind having them, in the first place, and this needs to be considered while executing these. While legal compliances may make one approach difficult, if not impossible, if the family is together, they can work out another alternatives, which may not have been under consideration when the agreement was drawn up, but it meets the spirit of the agreement. Of course, this needs a lot of trust and confidence to be successful and the purposes of the family achieved.
The question is, how many families will have the foresight and patience to do this? The Jindals have shown that they can, but there are very few others…