Family Wealth Disputes: Preparation Is Key
Mavis Tan, Senior Partner, Control Risks
Money, power and pride weaken family ties. This has become more prevalent in recent years, manifesting in multi-billion dollar family disputes heard publicly in open court and making headlines in the international press. From the high profile will dispute of the late Nina Wang, formerly Asia’s richest woman, to South Korea’s Lee family power struggle over Samsung, we have seen it occur within Asia’s wealthiest families. What is driving this phenomenon and is there a smart way to navigate high net worth family disputes?
Asia’s fortune: It’s all in the family
According to a 2015 Credit Suisse report, Asia is home to 76% of the top 900 listed family-owned businesses with market capitalization of at least USD 1 billion. The development of these businesses can be traced back to the entrepreneurial expansion that started after World War II and the rapid growth of capital markets following the Asian financial crisis in 1997-98. Many of these businesses were built by now ageing entrepreneurs and are reaching a stage where succession planning and transitioning through to the second and, in some cases, third generations are key to the continued success of these empires. Therein lies the problem – transitioning in the face of rivalry between siblings, wives and different family factions is no easy task.
When litigation is inevitable
Family disputes are personal, often bitter affairs where commercial considerations do not always drive their resolution. Of course, mediation via a trusted and respected individual (whether a family member or third party) should, where possible, be explored first. But what if litigation is the only option? The best form of damage control is to be as prepared as possible. Having been involved in numerous high net worth family disputes in our capacity as forensic accountants and investigators, we believe there are a few things parties can do to stay ahead in a dispute.
1. Your core advisor team
From experience, you need to first assemble a core team of trusted advisors. This team should comprise legal experts (often there are complex trust, probate and commercial issues in multiple jurisdictions to contend with), forensic accountants and investigators, and crisis communications specialists. It is also a good idea to have a trusted confidante (usually a senior figure in your family office) manage and coordinate the different advisors. This person’s primary role is to ensure all day-to-day decisions and actions are taken to protect your best interests. Many people underestimate the amount of time and resources required to see legal proceedings through to conclusion. Having the right team and good advice from the start saves a huge amount of time, stress, money and in many cases, embarrassment.
2. Information is key – do your homework
Of paramount importance is being equipped with the right information, particularly details of the underlying assets subject to the dispute. This will drive your legal strategy for pursuing or protecting those assets, depending on whether you are the claimant or defendant. This information also enables informed and often critical decisions to be made along the way, for example, in the formulation or assessment of early settlement offers.
Asset identification and mapping
In Asian cultures, privacy remains fiercely guarded when it comes to one’s personal wealth. Often, there is no clarity on the extent of a tycoon’s assets, their location and true value. This is in part due to the widespread use of individual and corporate nominees to hold assets. In a dispute, the party seeking information about assets is typically faced with a complex web of nominees and layers of onshore and offshore structures, usually involving trusts in multiple jurisdictions.
The first step is therefore to identify individual assets and piece them together with the help of forensic accountants and specialist investigators who can access information on these assets through official databases and on-the-ground discreet inquiries. It is not sufficient just to locate the assets; you also need to map out how they are held. Only then can you develop the right strategies to assert your legal claims over the underlying assets.
What is it worth?
The next question that emerges is: what are the assets worth? This is often not straightforward when you are assessing the value of business interests that require a certain amount of financial information about the companies (often privately held and not immediately accessible). In the initial stages of formulating your legal claims or defence, you are not looking for precise valuations, but a credible estimate of what each principal asset might be worth. This helps you test or defend your opponent’s initial claims about the extent of the disputed assets.
Having information on specific assets also assists with the discovery process in the course of litigation. This is particularly the case where asset valuations have been artificially deflated through irregular accounting treatment and/or related party transactions, or where there is a deliberate attempt to conceal assets.
Having ballpark valuations in mind also helps when considering and negotiating settlement offers. On one engagement, we were asked to estimate the “value of action” and model the estimated net return to the plaintiff at the end of the proceedings compared to the monetary offer on the table at the time. This exercise took into account opportunity cost, time value of money and legal costs. This ultimately facilitated successful settlement of what would have been a long drawn-out litigation at great cost.
Leverage or pitfall?
As with any asset dispute, parties to a family dispute should be aware of potential leverage and pitfalls with the manner in which assets are held and accounted for. Common areas of attack include trust distributions not being made as reported, incomplete disposition of assets, improper or undocumented capitalisation of or loans to offshore asset holding companies, failure to pay gift tax, irregularities in director accounts, undisclosed capital transfers and questionable related-party transactions.
In one trust dispute, we identified significant discrepancies in alleged charitable donations that were no more than round-tripping payments to related parties of those in control of the trust. In another dispute over the shares of a private company, we undertook large-scale reconstruction of director and shareholder accounts over more than a decade to facilitate an equitable buy out of one shareholder’s stake in the business.
All forensic accounting work performed in investigating transactions, reconstructing records and evaluating assets must be properly supported and documented to a standard that is fit for use in court as ultimately they need to be legally defensible. In this respect, it is advisable to use forensic accountants who are experienced in working with international legal teams and are well-versed in the doctrine of legal privilege and attorney work product.
3. Communicate strategically
Owing to mind-boggling amounts of money at stake, often soap-opera deserving plots and the high profile nature of the parties involved (some of whom may also be politically sensitive), high net worth family disputes draw a lot of media attention. Certain parties have also exerted their influence over the media to smear their opponent. It is therefore imperative that parties have the support of a crisis communications specialist that is not just a public relations firm, but able to advise and execute on a media strategy that ensures the right level of engagement with appropriate media to ensure consistent messaging from a single source. It is also imperative that press statements are accurate and factual (this will have an impact on the judge), and confidentiality and legal privilege are protected.
In certain instances, it may be necessary to consider government and key stakeholder mapping in the overall communications strategy. It may also be desirous to seek a confidentiality order from the court to prevent damage as a result of exposing private family matters to the public.
4. Preserve and monitor the assets
Once you have your ducks in a row with your claims over the disputed assets, you need to ensure they are preserved over the course of litigation. There are various legal means of ensuring asset preservation.
5. Transitioning control
To avoid further dispute once a division of assets has been agreed or ordered by the court, it is often advisable, in very contentious matters to have an independent party assist in the transition of control over companies.
It is extremely challenging to attack or protect wealth accumulated by your closest family members. The stakes involved – reputational, emotional and monetary – are often staggering. Accordingly, it is imperative to be thoroughly prepared by taking the necessary steps to achieve transparency, confidentiality and speed in a family wealth dispute.