Succession in family business: crisis and perspectives

Law is not always an ally in the survival of family businesses. Even in a country where around 90% of companies are family businesses, a major challenge for entrepreneur has been and still is to ensure the stability and continuation of the business along generations.

Emerson de Almeida, co-founder of Dom Cabral Foundation, published an interesting piece called “succession as it is”, in which he demonstrates, after decades of interacting and working with businesspersons from all over the country, how companies’ performance and even survival are challenged during family successions. The businesspersons, according to the author, nurtures contradicting feelings, for on the one side, he worries about the future of the company and, on the other side, is reluctant in facing the feeling of loss and ostracism that follow a transference of management. When it comes to its effects, when administrators overcome their fears and allow for a well-planned and peaceful succession, the company sails smoothly. Whenever that is not the case, there is high risk of turbulent times that can even stop the company’s activities.

As stated in the press, only 30% of Brazilian companies manage to survive until the second generation, and mere 5% reach the third generation. We are not only talking about small businesses, but also large family corporations, such as WEG, Itaú-Unibanco, JBS, Novonor, Gerdau and Votorantim, among others. Brazilian legislation does not appear to have yet paid attention to such data.

In comparison, in Switzerland, since 1991 there are specific rules for agricultural family company succession. In 2006, Italian law started admitting succession contracts specifically for family companies. Germany widely regulates succession agreements, allowing members of the family to create their own personalized succession regulations, meeting the particularities of their family assets and the skill of each heir. On the other hand, in Brazil, there is no specific mechanism to preserve companies or avoid rural property fragmentation and their subsequent loss of economic efficiency.

On the contrary, evidence shows crisis in probate law, which, encroached in its dogmatic view, ignores essential economic factors to the perpetuity of family businesses. A symptom of this crisis is the widely observed “flight” from the will, an immensely potential instrument, that which has been losing room in succession planning to corporate structures that offer more options in its structuring and higher reliability in its execution.

Under another perspective, resorting to corporate law for succession purposes, when wrongly implemented, ended up being even more problematic. The popular view of easy succession solutions via ‘holdings’, without the due care, is frequently countered in courts, which have been ruling as void this sort of structure when it is considered a mere simulation. In other situations, such structure is implemented with a shortsighted approach of immediate tax saving, without further analysis of other aspects: it is not uncommon for heirs that do not pay the 4% to 8% succession tax and is later surprised by having to pay a much higher tax (22.5%) on his share in the estate due to capital gain, or even losing 50% of that share in a divorce.

Succession is ontologically multifaceted, and as such cannot be planned from a single view of probate, tax or even corporate laws. There arises the need of a multidisciplinary course of action to, more the pose as a solution instrument, safeguard family and business interests.

When this scenario is acknowledged, the perspectives as promising. In the realm of the family, the businessperson already recognizes that succession is a fundamental factor in any business: well-elaborated plans of large companies, such as WEG and Grupo Ultra, have proven that. The recurrent failures of easy solutions have awakened, above all in businesspersons and farmers, the need for a more carefully thought of succession planning that analysis not only immediate tax effects, but more long-lasting ones and corporate, family and succession repercussions.

In the legal field, typical institutes of probate law, such as live estate sharing, which was even called an ‘exotic plant’ almost forgotten by jurists, has been receiving renewed attention as an expressly admitted succession contract, revealing a new space of freedom in succession. In sum, it is an instrument that allows the estate holder, together with his descendants, to immediately decide how the estate will be shared in the future, preestablishing which assets shall go to which heir and in what share. Its use allows, for example, the successor who already worked for the company to receive his inheritance fully in shares or stocks, while the heir who has another activity receives real estate, financial assets or even stocks in a smaller amount.

Since it is a consensual act, it avoids later discussions on the criteria used or even the fairness of the division, and when well elaborated with anticipated share of the estate, exempts estate inventory processes, costs and litigation.

Resorting to such an instrument of the law of things, such as usufruct or the indivisibility of certain assets, which can be imposed upon the testator for a particular period, although already old in our legal system, may come to be attractive mechanisms for the preservation of rural properties, be it to ensure administration centralization to a single heir and the division of the results among all, be it to avoid its fragmentation into several smaller properties, which frequently end up becoming unproductive due to the absence of sufficient structure and machinery, or even leased to third parties, in much less efficient operations from an economic point of view. From a business perspective, shareholder agreements allow for similar solutions.

In the same sense, the reformation project of the Civil Code proposes several amendments to allow for more succession autonomy, such as the exclusion of the spouse from the category of mandatory heirs. In a scenario that is more and more common, with people having more than one marriage or domestic partnership, it is natural to wish that their estate goes only to the descendants and not to the spouse, who commonly is someone who participated in the life of the estate holder for a brief period.

The important is that both businesspersons and jurists are awakening to the need of understanding succession as necessary for the preservation of the family business. At the end of the day, it is the company, or the farm, that will generate the resources from which all shall benefit. Safeguarding the business means, in the end, protecting the very heirs, and the perspectives of doing so are highly positive.