Keeping it in the Family

For decades, perhaps in some cases even close to a century, family businesses have formed the backbone of the Guyana economy. Some of these, like Psaila Bros., Rodrigues Limited, the Wright Brothers (Russian Bear) Bettencourts, Elias and Sons, D. M. Fernandes Ltd., R. B. Gajraj and Sons Limited, Jaikaran’s Drug Store, may have faded out of national memory. Some are in transition such as A. Mazaharally & Sons Ltd., A. Amerally and Sons Ltd., Toolsie Persaud Limited., A.H. & L. Kissoon Ltd. and Rahaman Soda Factory Ltd. We recall too the name B. & J. Khan and Daughters suggesting no sons.

Then there are a few family businesses which have survived but are not particularly active such as C.R. Jacobs and Ltd. and Central Garage Ltd. Of the still surviving and active family businesses John Fernandes Limited is perhaps the most successful, and prominent, growing into, by acquisition and organic growth into a conglomerate although A. Gafoor & Sons Limited has grown into a huge operation in its chosen line of business. And let us remember too that Banks DIH Ltd started as D’Aguiar Bros Limited and that Bookers itself that once was the B in British Guiana was once Booker Bros.

Why some of those family businesses succeeded while others failed requires much more than a newspaper column and would make an interesting study for the resourceful student of the University of Guyana. Indeed, such a study would make for a good book.

What I think we know anecdotally is that some of the business families felt uncomfortable at the turn of events of the fifties signalling a significant shift in the status quo; or the events of the sixties during which civil unrest threatened to divide Guyana; some just could not survive the tough business climate of the seventies; while others felt that 1980 marked a decisive political point for them.

Of those which stayed, the second generation of a number of them spent more time on acrimonious and bitter family feuds in and out of the courts than on the business at hand. Indeed there are a number of cases involving shareholders in family companies still in the court system, having outlived more than one judge in the case. However, since the matters are unresolved I would use the following example from abroad to suggest one of the other difficulties faced by family businesses and that is how the business is run. It is a story not dissimilar to some of our own, save that in this case there was a complication of trustees looking after the shareholding of an excluded son.

A tale
The story is of Harry Winston, the jeweler to celebrities, who had two sons one who graduated from a top university with a degree in chemistry, worked in rocket research, and then entered the family business at the request of his father. The other, Bruce, had dropped out of college and was uninterested in business affairs.

When it came time to pass the business down to his sons, Mr. Winston had the same instincts as most parents in this situation: he wanted to treat his sons equally financially but also wanted his business-oriented son in charge of the company. He attempted to achieve this by leaving the business equally to the sons, but Ronald, the hardworking one, was a trustee, together with two professional trustees, for the share of his brother, Bruce. Ronald was also left in charge of running the business. The result of this estate plan was twelve years of litigation between the brothers (and corresponding litigation against the other trustees lasting even longer). Not surprisingly, that was the end of the business.

Can we learn from Harry or the family businesses which have ended up in the Guyana courts? The answer is probably. The economy recovery programme has turned up new entrepreneurs and business patriarchs who are still around exercising firm control of their business. Still relatively young, these new first generation entrepreneurs or sole traders may not even be considering anything like the challenges of succession planning; something they think can be deferred.

That is probably not very wise. After all, the problems of succession planning have plagued our political arena – remember Dr. Cheddi Jagan? – as they have affected businesses. Since the reality and experience in Guyana is that family businesses regularly struggle with succession planning which threaten a business’s survival, the least that the founder should do is consider how the danger can be avoided with some level of planning.

Unfortunately but not surprisingly, not even the best conceived plan carefully drawn up by the most talented attorney is a guarantee of success. And as Harry’s case suggests, the court is hardly the best place to resolve what essentially family issues are revolving around money. Leaving it to the next generation is always an option but that is both unfair and unwise. Can lawyers help, or indeed the Companies Act?

There is a certain dilemma about family businesses. Unless the business is growing as fast as the number of family members – who are likely to be the surviving spouse and children of the founder – it would be unable to accommodate all of them. And even if it is fast-growing, disagreements among the second generation are inevitably going to arise over how the business should be run, how profit is divided, which family members are placed in which positions, whether remuneration is based on equality or competence, etc. And even when these business issues are addressed the personality and family issues will always hover.

And where the business is not doing well or cannot accommodate all the family members the question is how should the business be managed, how are those actively engaged in the business to be rewarded vis-à-vis the passive owners? Non-participation in management does not mean fewer expectations about receiving benefits from the company. In fact those on the outside are always prone to believe that the business is doing better than the management is prepared to admit.

Peter D’Aguiar certainly found an excellent solution: go public in which case the value of the shares is determined not by an auditor who is himself paid by the family member who engaged him. Sadly despite all the incentives offered in the past two decades there is a certain reluctance among businesspersons to go public. Some think it is to avoid the accountability which goes with being a public company.

A company run on strict business principles allows certain advantages over the family-owned business that is really a partnership. If it is large enough it can afford to recruit outside management to run the business with targets, budgets and salaries effectively set by the owners. Firing an outsider manager is much easier for a board of directors than firing a family member.

Majoritarian Concept
Guyana’s Companies Act 1991 is modeled on the Canadian Business Corporations Act. The Act tries, as best as the law can, to anticipate controversies arising among members. But the Act is still based on the majoritarian principle under which 50% +1 gives an enormous amount of power, often leaving the rest sullen and dissatisfied. This model means that the shareholders in the minority might have no effective say on the Board of Directors or in electing anyone who does not find favour with the majority.

With practically no resistance, the controlling shareholders can do many things detrimental to the other shareholders. They can remove a minority shareholder from the board; terminate the minority shareholder’s employment with the company; and pay only huge salaries and allowances to themselves as executive directors but no dividends on the shares, thus cutting off the minority shareholder’s income from the company. Some go even further, refusing to hold annual general meetings and practically frustrating and shutting out the minority. To make matters worse, the minority shareholder has to retain his own legal counsel at his expense to seek to assert his rights, a process that can take several years.

The Companies Act allows for some options, including recourse to the courts for a meeting; action against the company and its directors for oppression against them; or, depending on the particular facts of the case and the approach taken by the court, relief can take the form of a cash-out at fair market value of the minority shareholder’s interest in the company. Such scenarios apply to all companies, although they can be especially useful to shareholders seeking remedies in a family company where controversy and conflicts have arisen.

What I think is a particularly useful device for family companies is a tool under the Canadian Corporations Act called the Unanimous Shareholders Agreement (USA). The actual wording of the Canadian Act is as follows: ‘Subject to a unanimous shareholder agreement, the directors shall manage the business and affairs of a corporation.” Where a USA is permitted by law, it can spell out all the powers, rights, obligations, and restrictions of the parties to it, including how the directors must run the company, what is the extent of their authority, their remuneration and its basis.

Inexplicably, while adopting the general framework and several scores of provisions of the Canadian Act, the framers of the Guyana Act left out the sections dealing with the Unanimous Shareholders’ Agreement. Consequently, the Guyana Companies Act does not allow for a USA.

Succession planning, USA’s or provisions in a company’s articles and by-laws might be useful in guiding family-owned businesses to avoid some of the pitfalls that led to the demise of earlier generation businesses. Perhaps the best guarantee is one of trust and recognising that all parties will gain from success and stand to lose from failure. They can choose which they prefer.

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