By Prof. Enrique Soriano
A husband-and-wife tandem started a trading company in the 80s. Along the way, the couple raised two sons. The youngest son, B, began working in the company right out of university and eventually became the company’s President. The eldest son, A, had a different passion and showed interest in the arts. As part of the founders’ wealth transfer and estate planning initiatives, they expressed confidence in passing their business down to B, the dedicated son, in due time. Besides their group of companies, the founders owned several assets that generated a steady stream of rental income, cash, jewelry, and a significant amount of agricultural land the wife inherited from her parents.
During the mid-90s, the founders diversified to property development, but their growth was short-lived due to the Asian Financial crisis that hit many Southeast Asian economies. When the market started to recover in the early 2000s, the founders trained their sights on constructing housing communities. The timing was just perfect as Malaysia launched its “My Second Home Retirement program” around the same year. The latter was aimed at luring foreign retirees and working expatriates interested in having Malaysia as their second home. With the right community projects, the business grew quickly.
A Double-Edged Sword
With the businesses going full throttle, the couple became worried that if they gave the business to son B, which seemed fair to do, they would not have any means to treat son A equally, which seemed unfair to him. But while splitting up their assets 50/50 between the two children would treat them equally, it seemed unfair to son B as he was instrumental in the growth of the businesses for more than two decades.
Here we have a case of two siblings, A and B, inheriting an estate that the founders plan to split at 50/50. We also have a case where the parents were very clear and categorical that B should be the one managing the businesses and not A even if he was the eldest since B has proven himself to be a fully committed, fair, and responsible leader. But there is a downside to this 50/50 arrangement. According to the father, B poured out his emotions one night and expressed fears of a future when his parents were no longer around. B highlighted a scenario where A could just easily assert his rights as a shareholder in their family’s group of companies, especially with a 50% stake in their firms. It didn’t help that A was older by 3 years.
Note that any shareholder is clothed with inherent rights as mandated under the Companies Act. In more specific terms, a shareholder has legal or voting rights to decisions promoted or put forward during Board of Directors meetings and the Annual General Meeting (AGM). By virtue of A’s ownership, the law provides certain authority rights. This means that A, as a part-owner, has rights to make decisions about what he owns, including access to certain information. And finally, in the absence of any conditions, A can invoke his economic or financial rights, legally allowing him to sell and promote his shares to an interested buyer.
Different 50/50 Split
During our wealth and exit planning sessions, my team suggested that the founders initiate a short-list of their most valuable assets and have it appraised: the businesses and the properties. Independent appraisers were brought in to value each asset. Since the bulk of the asset was in real estate, we did not encounter much difficulty putting value in their portfolio.
With the valuation in place, we suggested to the founders that instead of splitting the entire estate 50/50, they should consider giving the business to Son B and the other non-core properties (a mix of real estate and non-real estate assets) to Son A.
Was this estate transfer a fair split?
