Disputes need not destroy value

Marsha came to see me last year. Her father Mohammed had died unexpectedly leaving a very large family home in Knightsbridge worth in excess of £15million. At the time of his death Mohammed was married to Sally; a daughter of a very wealthy family, so he had decided to leave the property to his four children; Marsha and her three brothers. Neither child was resident in the UK, so the apartment remained largely empty.

A year before his death he had de-enveloped the property to avoid ATED and at the time of his death he owned the apartment personally. His estate was now facing a £6,000,000 inheritance tax charge.

Two of the four children Abdullah and Salah worked closely with their father in his clothes importing business based in the Middle East and the third was working as a fashion designer, but not with the family business. Mohammed had fallen out with Abdullah before he died. Abdullah had been pressing for greater transparency with their creditors and wanted to restructure the company’s debt – but his father had resisted. As a result Mohammed had removed Abdullah from the board.

Salah remained on the board and he and Abdullah were now not speaking to each other. All four children were executors of their father’s estate and Marsha was using her best efforts to administer it. However, it was not proving easy given the animosity between the two brothers. At their last family meeting the two brothers had to be restrained from fighting each other.

Marsha had come to me to see what could be done about saving the inheritance tax on the property in London. I suggested that the executors enter into a Deed of Variation to pass the benefit of the property to Mohammed’s wife, and thereafter to the four children which would save the estate £6million pounds.

All four children were agreed that this was a good idea and the variation was accepted by HMRC without a hitch. As Marsha and I celebrated our success over a cup of coffee, she confided in me that the dispute between her brothers was damaging the business and the company’s bank was putting pressure on the board to sell it. However the business was now worth less than half what it was on the death of her father, and she wanted to know what could be done to restore its value.

I asked what Abdullah and Salah would do once they received funds from their inheritance. She said they were already having preliminary talks with lawyers to litigate against each other. I suggested that they try to avoid this form of dispute resolution. It would destroy the value of the company, drive the family apart and ensure that the brothers never work together again.

Marsha was keen to explore this further. I contacted my dear friend Philip. He had recently retired from practicing as a leading dispute resolution lawyer and he agreed that litigation was not the best way to resolve this type of dispute – ‘mediation would be quicker, cheaper and private’.

I put this to the executors. To begin with Salah refused to co-operate. He was in control of the board and did not want to share this power with his brother. However it was obvious that the board wanted Abdullah back. He was more experienced with the financial aspects of the business, whereas Salah was better at sales.

Philip then spoke with each one of the four executors. Salah finally conceded to mediate in the knowledge that if a deal could not be found he could still revert to litigation. The cost of the mediation it was agreed should be met out of the funds in the estate.

Philip and I collated the facts, interviewed all four children as well as each and every member of the company board and then hired two meeting rooms in a hotel for two days to hammer out a deal.

The irony of the exercise was that once we started to drill down into what everyone thought was best to restore the company back to its former value it was surprising how similar everyone’s views were, even Abdullah and Salah were not far apart in what they saw was best for the business. Neither the executors nor the board wanted to sell.  Furthermore, when the views of the board were put to Salah, in an objective and unemotional manner he came to see that the business would be better with Abdullah than without him.  At this point it was easy to come to a deal which they could accept.

The resolution of this dispute, like so many family issues, can be met, when emotions and irrelevant history are not included in the negotiations. Mediation makes angry parties see the dispute objectively at which point it is usually easier to resolve.

Abdullah and Salah were now faced with a new problem - how to restructure the groups finances so that they could buy time to restore the company to its former value. I suggested they meet Richard, a former leading corporate lawyer, who like Philip had recently retired, but keen to get involved in projects which could benefit from his expertise and knowledge.

With Richard and Philip and a few other leading experts a strategy recovery was quickly arrived at and implemented for the benefit of all – a very satisfying conclusion.

Working with families of considerable wealth and in particular when the wealth is tied up in a family business GFOS recognizes that families require a multi-faceted approach to get to the right solution. We do not work on a project and then leave the family to its own devises to resolve the next issue – we go on solving problems as they arise. With Marsha’s family, a tax plan led to a dispute resolution which led to a debt restructuring – it could have resulted in sale in which case we would have worked with them to devise the most appropriate investment strategy, and what type of investment management they needed, how to structure the investments and how to preserve it for future generations or if preferred how to give it away. As a family office we focus on the family and their issues – whatever they may be from cradle to grave.

If you would like to find out more contact svetlana@garnhamfos.com or phone 0203 740 7423 to book an appointment with Caroline and her team.