Friday, September 29

Anticipating children fight, do a buy-sell



TEH and Fong have had a successful joint venture, called Advanced Computing Machines Sdn Bhd (ACM), distributing computers and accessories throughout Malaysia. Each of them had an equal share, i.e. 50 per cent, in ACM.

Teh and Fong were classmates since primary school and had a closer relationship to each other than to their own siblings. They had started the business since 1980, at a time when the market was still new. Desk top computers were clunky, and laptops were unheard of.

The entry of the ACM joint venture was based on their shared conviction that the market for desk top computers would be big as such machines became popular among corporations.

As manufacturing cost of computers came down, the market soon developed into a very competitive one. Fortunately, ACM, being one of the early players, had a significant market share, and could survive on razor thin margins because of economies of scale and good teamwork between Teh and Fong.

Teh excelled in marketing and Fong was a strong operations man. The two blended well and grew market share successfully. Profit grew to exceed RM10 million on a RM900 million turnover.

By year 2000, ACM converted into a Berhad and became listed on the Malaysian Stock Exchange. Teh brought in his son as his assistant and Fong’s son joined shortly after as the company accountant. Their thoughts then were for their sons to be joint successors to the business.

Over time, however, it became clear to Teh and Fong that the two sons did not get along. They often complained about each other to their own father. The animosity between them grew, basically stemming from a lack of trust. Fong’s son, being a typical accountant, was always eager to check on business development expenses while Teh’s son resented his constant querying.

One day, over a golf session, Teh expressed his concern to Fong. They both acknowledged that it would be a disaster for the business if both sons were to inherit what they owned. They decided to seek advice from me, whom they both knew for more than a decade as an investment banker.

They met me over lunch and after a few pleasantries, brought up the subject of their concern.

Teh started by asking: “Jo, as you know, we have equal shares in AMC that you helped bring to IPO, and we are concerned that if one of us die, the share in the business will go to our family and disrupt the business.”

Fong added: “The big worry is that our sons don’t get along. Sooner or later, there will be a fight and the business will go downhill. Is there anything we can do besides leaving our assets in a will?”

I said: “Yes. There are two routes you can choose from. One is to sell the shares now, either wholly or by majority to a party who is interested in developing the business further. The second is to sign a buy-sell agreement between the two of you so that when you die or become mentally incapacitated, your representative can sell to the other at a pre-agreed price or price-fixing formula.”

“But what if our successor refuses to honour the agreement?” Teh asked.

I replied: “This is where it would be useful to do this agreement with an independent trust company to act as your attorney. The trust company can then enforce the provisions that you have both agreed to, and ensure the proceeds of sale go to the beneficiaries.”

“What if my family does not have enough cash to buy?” asked Fong.

“Two ways. First way, you can agree beforehand payment by instalments. Or second way, as commonly done, both of you can buy insurance, for a sufficient value to cover the shares to be purchased when the time comes.” I said. “For the process and the tax implications, consult an experienced trust company.” I added.

Shortly after, the buy-sell agreement together with two insurance policies were put in place with the help of the trust company.

In 2020, Teh died from Covid-19 infection and the trust company claimed the insurance proceeds, which were paid to the beneficiaries, and his shares were transferred to Fong.

This was a happy ending, avoiding conflict and hardship for the next of kin.