London schemes industry set back! Are we about to see an end to aggressive “schemes forum shopping”?
An extraordinary coincidence of timing at the excellent R3 Insol Europe International Restructuring Conference in London today. Global Turnaround Editor, John Willcock’s informative market update featured “London’s scheme Industry keeps on rolling” as a keynote topic. He pointed out the recent COMI shift objections in the Codere and Indah Kiat cases to what the court described in Codere as “… an extreme form of forum shopping” and “grabbing someone else’s debt just to get rid of it”. But just two days before reports had emerged that a German court, in ruling on bond holder claims written under Austrian law, whilst rejecting a German insolvency filing, had stated that Scholtz’s COMI was in Germany; this whilst Scholtz’s advisers have been active in migrating certain management functions to UK to establish a UK COMI and sufficient connection to proceed with an English scheme of arrangement to restructure Scholtz’s debt.
Whilst scrutiny of the detail of the judgment is awaited it is interesting that apparently “contrived” aggressive forum shopping is being seriously questioned by courts in both England and Germany. In a further conference session on developments from the European Union the concept of “COMI at the transaction date” was mentioned. Maybe this will appear in a forthcoming directive and further undermine post distress COMI migration. This would certainly be too late to affect the Scholtz restructuring but what is evident is that courts are alert to spurious forms of forum shopping and are taking a more demanding look at the underlying reality.
In the short term, the advisers of Scholtz may have to go back to the drawing board unless they can convince an English Court judge to take a contrary view to his German counterpart. Now that would be interesting!
In a 2008 article on family-controlled media companies, Professor Jonathan A Knee, the then director of Columbia University’s Media Project, wrote:
“The prime determinant of how long a family dynasty will endure is how well its business is run. Nothing is more likely to spur a family insurrection and provoke demands to sell than the perception that the business is not being managed efficiently. Those who romanticize family ownership are often the same people who encourage policies that will almost certainly accelerate its disintegration.” (Portfolio: 2008)
I think Knee was on to something very important at a time when virtually all of the writing on family business was about succession (ie, how the older generation owners of a family firm pass control to their progeny). To gauge by the number of pages of articles and books about family business focused on succession, it would seem that the views of most ‘experts’ were (and remain) that succession is the primary issue in family business. I do not agree.
Should ‘success’, not ‘succession’, be the primary focus of families that control operating companies? In my view, the answer is clearly, “Yes, but...”
Here is a nasty little secret about corporate governance in family-controlled companies: no one ever resigns as a matter of principle, even when use of this ‘nuclear option’ is clearly called for by the facts of the situation.
For virtually my entire career as an adviser to family-controlled companies, I have endeavoured to persuade my clients that either adding directors independent of management to their board of directors or creating a non-fiduciary council of advisers would enhance their competitiveness and improve their bottom line. Most of them have concurred, eventually. I have participated as governance architect, independent director, independent trustee or council of adviser participant in more than 75 governance bodies for family-controlled companies, both publicly traded and privately held. But in 35 years of advising family firms and the family shareholders that control them, I have witnessed resignation as a matter of principle only once.
Some situations expose the hidden underbelly of corporate governance in family firms – that loyalty to the controlling family can erode and eventually undermine an independent director's commitment to his or her sense of urgency about taking a dissenting position on a matter of principle. There are at least three exceptions to the rule that independent corporate governance correlates positively to enhanced performance of a family-controlled company. These exceptions include at least the following three scenarios.
When owner/managers are leading the family firm to disaster
This is a question that many families around the world are asking. Industry trends – such as the shrinking number of traditional private banks, financial market unreliability and increases in private wealth – are causing families to rethink the best solutions for managing their family wealth. For many, this means exploring the option of creating their own family office.
A single family office (SFO) has the advantage of maintaining control by the family. The family chooses its paid staff and those staff are dedicated to the one family. However, on the other hand, it is costly to staff a dedicated private office and difficult to find and retain the right talent.
A family is likely to consider a number of alternatives before finally deciding on the bespoke model of its own SFO. The alternatives range from joining an existing multi-family office (MFO) to taking advantage of one of the multitude of investment institutions and claiming that it has a branded family-office service.
On closer examination, it is likely that investment institutions are focused more on asset management than on providing the softer range of family-office services. If those services are provided, it is often at no charge (because they are difficult to charge for), and they are thus available only to those clients with sizeable investment funds managed by the institution (which is the source of traditional fees). Is this really a family office? Or is it a private bank department rebranded as a family office? When the provider offers its own proprietary investment products, is the advice really independent or are conflicts of interest inevitable?
Family-controlled companies are growing by acquisition, more now than at any time in the past 35 years that I have been advising these enterprises. Most corporate finance professionals whom I have met, and the lawyers who advise them, view family firms as inventory for their deals – and low-hanging fruit at that. In my opinion, this view is both obsolete and dangerously myopic to private equity partners and business development executives as strategic players in the acquisition market.
In the first instance, most of the low-hanging (family business) fruit that did exist has been harvested by private equity firms. In the United States 15 years ago there were hundreds of such firms; now there are thousands. But – more significantly for the future of the private equity industry in its never-ending search for deal targets – what is left of the family-business sector in the United States is largely too small and too weak to be worth acquiring, or too strong and too sophisticated to be purchased at a bargain price.
In other words, family-controlled companies that used to be targets for acquisition are now competitors of both financial and strategic buyers. Most intriguing is the entry into the acquisition business of single family offices with both substantial liquidity and deep expertise in the world of family enterprise. Both family-controlled operating companies and single family offices bring assets to the business of acquisition that non-family controlled buyers cannot match.