Heirs, fears and tears: The rollercoaster of succession and how to minimize risk

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In family enterprises, where personal ties intertwine with business dynamics, the transfer of assets and control from one generation to the next too often involves drama, conflict and legal disputes.

The recent experiences of three high-profile families – the Rogers family, the Murdochs and the Arnaults – demonstrate these challenges and highlight the pivotal role of clear and legally sound governance to manage succession in any family enterprise, regardless of size.

Governance planning is not merely a formality; it is a vital step to ensure a seamless transition in family leadership and to shield the business and the family from the potential damage of disputes.

The Rogers family

In 2021, the Rogers family experienced a corporate governance dispute that played out in public as well as in court. Edward Rogers, son of the company’s late founder Ted Rogers, sought to replace the company’s CEO. However, Edward’s mother and his sisters publicly supported the ousted CEO.

The then-current board met and decided to terminate the company’s CFO, who was Edward’s pick to be the new CEO, and to remove Edward as chair of the board. Edward responded by using his position as chair of the Rogers Control Trust, which held 97 per cent of the voting shares of Rogers, to elect a new board that recognized him as chairman again. The former board, along with Edward’s mother and sisters, challenged the legality of this move.

Unable to resolve these differences themselves, the parties resorted to the court. The key task for the court was to determine the validity of the shareholder resolution Edward had passed to appoint the new board.

In this legal context, the court’s focus was on what the legally binding documents procedurally provided for in terms of how the company’s shareholders could make decisions. The court interpreted the BC corporate statute and Rogers’ articles of incorporation, finding that Edward’s shareholder resolution had been properly passed. Even the late Ted Rogers’ “Memorandum of Wishes” held no sway when it came to determining what aspects of the governance structure were legally enforceable.

The Rogers family’s situation underlines a critical lesson for corporate governance of family enterprises: The court will enforce corporate law, and while corporate governance practices and ideals may sometimes help inform court decisions, they cannot override legal provisions.

Recognizing this distinction, between legally enforceable documents and those documents that are merely aspirational, is essential in avoiding future corporate governance dramas when succession planning.

The Murdochs

In another example of a founder’s children engaging with each other within a closely held family business, the Murdochs show the importance of well-thought-out corporate succession planning.

Like with the Rogers family, a family trust holds the Murdochs’ interests in their key corporations, News Corp. and Fox Corp. This trust serves as the instrument through which Rupert Murdoch exercises significant control over the firms, holding nearly 40 per cent of voting shares in each company. Aside from this trust, Murdoch also holds some shares in these companies outside the trust.

Upon Rupert’s passing, this large number of voting shares will transfer to his four oldest children – Prudence, Elisabeth, Lachlan and James. This scenario could potentially create a situation where three of the children might collectively outvote the fourth on crucial matters such as selecting the CEO of Fox Corp., setting the stage for a potential struggle over the companies’ future, even as Lachlan Murdoch assumes leadership at Fox Corp. and holds the chairmanship of News Corp.

The direction this family enterprise could take revolves largely around the succession planning rules of the Murdoch Family Trust. It comprises eight votes: four controlled by Rupert Murdoch and four controlled by his children from his first two marriages. (His two youngest daughters from his third marriage do not hold voting rights within the trust.) Upon the transition, the four elder children are expected to inherit equally Rupert Murdoch’s voting shares in the trust as well as shares in News Corp. and Fox Corp.

The Murdochs’ circumstances highlight the challenges when one family member assumes a hands-on management role at the company while other family members do not. Families should carefully consider how any differences in the roles that family members play in the business will impact any inheritance.

The Arnault family

The Rogers and Murdoch families lie in contrast to France’s Arnault family, which owns the LVMH luxury conglomerate (the LVMH portfolio includes Louis Vuitton, Tiffany & Co., Christian Dior, Fendi and other brands).

The family patriarch, Bernard Arnault, has led LVMH to become the world’s largest luxury empire and enabled roles for each of his five children in its leadership.

The next generation of Arnaults has been integrated into the family business through hands-on involvement. Each child has been paired with seasoned executives who have mentored and guided them. For example, Delphine Arnault, in her teenage years, was consulted on product designs by her father. In February 2023 she was promoted to chairman and CEO of Christian Dior. Two of the children are also directors of LVMH.

Last year, Arnault altered LVMH’s corporate structure to concentrate decision-making with his five children. He also directed that the family holding company undergo a transformation into a limited partnership.

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Arnault intends to remain the head of the partnership until his children decide to remove him and take over the partnership. The children cannot sell their shares for 30 years without unanimous board approval. At the end of this period only Bernard Arnault’s descendants or entities wholly owned by them can own shares, and any transfer of shares will be subject to a right of first refusal outlined in the shareholders’ agreement.

The transition of the family holding company to a joint-stock limited partnership is intended to prevent hostile takeovers by separating control of management and capital, to ensure enduring family control over LVMH.

The Arnault family’s experience highlights the significance of succession planning in a family business. Their collaborative work dynamic, meticulous education of the next generation and dedication to maintaining family values serve as an invaluable model for businesses worldwide.

All three families – Rogers, Murdoch and Arnault – underscore the significance of embracing proactive succession planning, which not only mitigates disputes but also ensures the continuity of a legacy, guiding the next generation seamlessly into leadership roles.

Eric Morgan is a partner and Andrew Tebbi is an associate at Kushneryk Morgan LLP, a Toronto-based law firm specializing in corporate governance and dispute resolution (www.kmcounsel.ca).

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