Angela Calnan of Collas Crill Guernsey elaborates on why Private Trust Companies are an ideal option for Middle Eastern entrepreneurs who want to maintain control of their family business while it is managed by another entity

Private Trust Companies (PTCs) are the perfect way for a family to divest itself of direct ownership of the family business for succession planning while also retaining a comfortable level of control.

This falls in tune with the old saying – having your cake and eating it too. The PTC model has rocketed in popularity in the Far East in the last five years and this trend has started to permeate our MENA family offices. To understand the reason for this, we need to look at the lifecycle of a family business – from entrepreneur to family office – to reveal the trigger point for the need for a PTC.

Evolution of the Family Office – the PTC Trigger Point

Although no two family offices are the same, a single family office (SFO) starts life with the entrepreneur – phase one of the evolution of the family office. The family business often enshrines the founder's core values and the business itself will play a significant role in the dynamics of the family for generations to come if it is properly managed and handed down. The family business, when initially established and successful, could be regarded as the "glue" that binds the family together.

As the family and the business grow, there is an increased demand for other family members to join the firm for they are a trusted pool of talent who have grown up knowing about the business. As the next generation joins the business, a degree of management control is passed to them from the founder. This is phase two in the evolutionary process. Later, as the founder retires from day to day involvement, the siblings find it necessary to share power and control with each other. This is phase three. Given that the siblings are usually all close and that the founder is still involved, albeit behind the scenes, the way that family decision making is handled remains informal.

As the business transmits to the third generation and widens to cousins, it is usually the case that not everyone in the family is or wants to be directly involved with running the family business. While they might all be owners, management of the business tends to be left to a core of individuals who are not necessarily family members.

There is therefore a separation of ownership and management – this is phase four. Finally, the original business is likely to decline in importance over other businesses and financial interests. Often the original family business or a proportion of it will be sold and there will be an injection of family cash for investment. There is now a broad range of family interests and, without the glue of the original family business holding everything together, the family will need a new platform to capture and consolidate its interests. We have now moved from a family business to a family in business – enter the family office. This is phase five.

So, in this lifecycle, where does the need for formal governance by way of a PTC arise? The trigger event is between phases three and four – as we move from a small pool of family decision makers regarding one core business to a larger more diverse pool of decision makers regarding multiple businesses and family interests.

It is absolutely essential that, as we move from phase three to four, we formalise the ownership and governance structure.

It is best to act at this point or even earlier for two primary reasons:

1. The founder is likely to still be on hand so his wishes, culture and vision can be hardwired into the constitution of the PTC permanently for generations to come; and

2. With only a small number of closely related controllers in position at phase three, it is likely that quick consensus will be reached to move forward with the PTC structure. If we wait until the owner/manager structure becomes too wide – consensus is unlikely to be reached. Or, if it is, it is likely to be a lengthy and costly process.

The PTC Structure and Key Advantages

A PTC is a corporate entity – i.e. just a normal company – most commonly used for the entrepreneurial client who has a very valuable family business, the shares of which or proceeds of sale of which he wants to remain in his family for generations to come. The traditional method of passing down the family business was to put the company shares into a family trust run by a professional trust company as trustee.

However, historically, entrepreneurs especially in the Middle East and the Far East have struggled to get comfortable with the idea of handing over their valuable shares in the family empire to a "stranger" (such as an offshore trust company). The solution to that "loss of control" dilemma is the PTC. The entrepreneur sets up his own offshore corporate trustee and controls the board of it – at least initially until he becomes comfortable that the structure is working.

The PTC is a "win/win" – the entrepreneur can hand over ownership for succession planning purposes but can still retain a high level of control.

So, the key advantages of a PTC for Middle Eastern entrepreneurs are:

1. No loss of control – the founder can pass the ownership of his valuable business to a trustee but he can still control the board of the trustee. As such – he can have his cake and eat it too!

2. Unregulated – in Guernsey, PTCs are unregulated entities which makes them nimble and inexpensive to run and maintain.

3. Private – in Guernsey, the trusts that the PTCs looks after will be out of the public domain save as for the regulator's basic due diligence requirements on registration.

4. Longevity – Succession Planning – unlike individuals, a company does not "die" so the family assets do not constantly have to change hands as the family wealth transmits through the generations. The founder can set out his wishes when the PTC is set up – either in a Family Charter, or in the constitutional documents of the trusts or in a simple letter of wishes. These wishes will continue to permeate the administration of the PTC from generation to generation.

5. Good Value for Money – a PTC can be established in Guernsey within GBP5,000 to GBP10,000, depending on complexity.

6. Family Harmony – in acting early and organising the family's affairs before ownership fragments too far, it is possible to prescribe good family governance measures which can lay down a roadmap for decisions about the family enterprise for generations to come.

That way, everyone knows where they stand and the expensive and upsetting family conflicts which so often arise in the third generation can be avoided.

An original version of this article appeared in The Oath, December 2014.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.