Do present legislative conditions allow family businesses to thrive to their fullest potential? Are governments managing to leap over all the hype about the benefits accruing from family business? Are they offering the legislative frameworks to provide family businesses with the support they require to plan across generations rather than aiming for short-term quick returns, and to fulfil their role as job creators, job protectors during tough economic cycles, and innovators?
For the vast majority of countries around the world, the answer to these questions is flagrantly in the negative.
The notable exception is Malta, which has taken the initiative to embark on the development of a forward-looking piece of legislation. This should help Malta differentiate itself from the rest of the developing and developed countries worldwide.
Family-run companies form the backbone of Malta’s economy. However, as yet there is no clear definition for what is understood as family and family business for the objectives of families in business.
Over the past 25 years Malta has been developing itself as a leading destination where international businesses including family businesses relocate or establish their holding companies. At the same time Maltese family businesses still suffer from significant tax disadvantages when compared to their European counterparts as has been proven through a European Family Business Survey on the tax hit that Maltese family businesses have to contend with during transition or succession phases. This, in spite of the fact that in Malta we do not have inheritance tax but we have a flat rate stamp duty.
Over the years, this scenario has resulted in family businesses having to face cash flow challenges during these particular phases. In some instances, these pressures have forced families to let go of their business assets. These practices do not make economic and commercial sense to government coffers in the medium-term, let alone in the long-term – this is because the losses incurred through the loss of these family businesses far outweigh any short-term gains to government coffers from the applicable stamp duty charged.
In the European scenario, we find various definitions of family businesses but all end up being tax incentives, deferments or other tax mitigation instruments. These are not specifically designed to the special conditions that family businesses have to contend, which are very different from those faced by normal businesses.
In spite of the increased awareness and the recommendations coming out of the EU – as can be seen from the document published by the European Economic and Social Committee INT/765 Family Business entitled ‘Family Businesses in Europe as a Source of Renewed Growth and Better Jobs’ – more concrete efforts have to be made to provide legislative frameworks that will assist family businesses during transition and succession phases. In fact, in this report Malta was singled out as the only country worldwide which has initiated work on the development of a Family Business Act.
In some instances, these pressures have forced families to let go of their business assets
In the US, we find US code 2057, entitled ‘Family-Owned Business Interests’, which specifically deals with tax issues for those businesses which can be defined as family businesses. The main focus is on tax deductions and allowances in relation to the general value of the taxable estate of the qualified family-owned business interests of the descendant. It specifies the allowable tax credits under different scenarios and also delineates the terms for gifting of the family business assets.
In the UAE, there has been a change in the law which has amended the existing companies’ law to allow family business to float from a minimum 30 per cent stake in their companies in an IPO down from 55 per cent previously. The reason for this law – keeping in mind the very high percentage of businesses being family businesses and the size of business found in the UAE – was to encourage some dynamism back into the UAE IPO market after the 2008 meltdown.
In all these scenarios and a multitude of others, none actually takes into consideration the very specific challenges that family businesses all have to face due to the blood relations and family dynamics at play within any family business. These pressures exist within any family business, even if they are vehemently denied or camouflaged through the creation ofvarious legal business instruments that blatantly exclude the rest of the non-shareholding family members who could at some point become owners and managers of their enterprises. How can these family members, overnight be expected to be fit and proper managers and owners of their family business if no family governance structures are in place?
It seems that what the Malta Family Business Act will be striving for is to understand the existing family dynamics taking place within family businesses, and provide guidance, solutions and incentives for family businesses to become better organised through proper family and business governance. This seems to be the direction that the Family Business Act is striving to establish, according to the latest presentations by Economy Minister Chris Cardona and Nadine Sant, chairperson of the Family Business Act Committee. This approach is what makes this Act totally different from any other piece of legislation within the EU and other developed countries.
Some of the salient points that this legislation will strive to clarify are who is considered family for the objective of this legislation, who can become a shareholder for the business to remain a family business, how will the different classes of shares be looked upon by this legislation, how are owners to be represented on the board, and what are the exit rules for existing shareholders and other important considerations. This is a very long and complex list to manage. Hence I believe that it is once the White Paper for this Act is published, that the harder work will have to be embarked upon.
The legislation begins by defining and clarifying what is understood by the word ‘family’, specifically who is to be considered as an eligible family member for the purposes of the business. In fact the draft establishes that family members shall mean the owner’s spouse, descendants in the direct line and their spouses, brothers or sisters and their descendants. It will strive to provide clear definitions and a solid legal framework. It provides for clearer objectives, definitions of shareholders that make up a family business, treatment of different classes of shares, owner representation and exit rules for existing shareholders. In comparison to EU guidelines on family businesses, the Act’s definition is wider and more inclusive. In fact ‘spouses’ here does not only mean a husband or a wife under the marriage act but also partners in terms of the Civil Unions Act.
The proposed Act also brings understanding to what constitutes a family business in terms of size, ownership, control, decision-making and voting rights. The Act is also expected to include benefits that family businesses will qualify for and these will include any assistance or relief granted in terms of the Duty and Documents Transfers Act, Malta Enterprise Act, Business Promotion Act and any other law as may be prescribed by the regulator.
The Act creates the role of regulator whose responsibility will be to guide on how it should be used and implemented. The regulator will not only be a licensor but will be a vehicle navigating the legislation to achieve optimum utilisation by family businesses. The regulator’s objective should be to bring together professionals and family businesses together and should also implement fresh initiatives and incentives both through advancements in the legislation and by building bridges with private partners.
A first of its kind in the developed world, the Malta Family Business Act is very ambitious. The devil is in the detail of this legislation and in how it is implemented. The Malta Association of Family Enterprises has been in the driving seat of this legislation. We look forward to the publication of the White Paper so that as an association, through the feedback that we will receive from family businesses, we will be in a position to proactively and practically forward suggestions and amendments where we feel these should be made.
Mario Duca is president of the Malta Association of Family Enterprises and managing director at Family Business Advisers Limited.