Introduction

The COVID-19 pandemic has had two major implications for family governance structures:

  • In the short term, travel restrictions and health risks have prevented business as usual for the foreseeable future.
  • In the long term, the increasing use of digital communication by families and their professional advisers is disrupting governance structures in some cases. Digital forms of communication (eg, videoconferencing) are here to stay; therefore, families should adopt appropriate policies and incorporate them into their governance structures.

Accordingly, families need short-term fixes to their structures, but should also ensure that their structures are 'digital ready' to ensure that they work in the long term.

Without these fixes, structures could face paralysis with disastrous effects for family businesses and private assets.

This article provides a practical checklist for family governance in the post-COVID-19 world. The considerations below apply equally to new and existing structures.

Checklist

Family councils and their legal advisers should consider taking the following actions.

Formulate digital policies

Families should formulate policies on digital communication. Is the family prepared to embrace (or tolerate) digital communication or will it frustrate the family ethos?

Identify immediate defects

Families and their lawyers should identify defects which require immediate changes. For example, what if board or protector meetings are premised on physical meetings, which cannot currently take place? Some structures may already be in breach or be unable to function.

Undertake detailed redrafting

Core rules on voting and meetings should be reconsidered. The sorts of question now arising include the following:

  • In what circumstances can or should governance be conducted digitally?
  • Is there a prohibition on digital meetings? Should some families prohibit virtual meetings altogether? If so, what should happen in COVID-19-like situations?
  • Do the rules allow for decisions to be made virtually and what are the digital voting procedures?
  • Should certain decisions be reserved for physical meetings (eg, the types of decision which require detailed discussion)?
  • Should certain decisions be digital? For example, should virtual meetings be encouraged for certain business decisions which require quick action?
  • Psychology and family interactions – families should consider how they can successfully interact digitally and how board members can 'read the room' in the absence of body language. Facial expressions become the only means of gauging reactions, which itself is contingent on a reliable internet connection. Should these factors shape decision-making processes? This may depend on the nature and size of the family.
  • Original documents – access to the trust documents themselves may be critical; are they always accessible?

Mitigate tax issues

Families should consider how to mitigate the risk of bringing structures onshore when working digitally (especially if trustees are grounded onshore in crisis situations).

Re-evaluate core provisions

The current crisis highlights the ongoing importance of reviewing several core provisions:

  • Exit strategies – the current situation may put a strain on families who cannot meet, particularly if unresolved issues exist. Equally, it will put a strain on asset values if family businesses and private assets lose value in the current market. This reinforces the importance of exit provisions for those families that permit exits. If family members wish to exit, there must be rules to govern how (and whether) this can be done.
  • Capacity issues – the pandemic is a reminder to check that structures have thorough provisions for incapacity, whether temporary or permanent.
  • Importance of board appointments – the boards of many family entities are now dealing with the economic fallout from the pandemic. In some cases, survival will depend on the actions of board members. This underlines the importance of making the right board appointments and ensuring that there are effective successor appointment provisions.
  • Investment advisers and protectors – similarly, the current challenges show the importance of effective provisions for investment advisers or committees, and protectors.
  • Flee clauses – flee clauses automatically trigger certain actions (eg, transfers of trusteeship) in crisis situations. Should flee clauses be activated in the event of a future pandemic or similar emergency to ensure effective governance? If so, how would the new jurisdiction be determined? Equally, how are 'trigger events' defined and would a pandemic unwittingly activate a flee clause?

Observe regulations

Economic substance rules require a physical presence in the jurisdiction where the structure is incorporated. Structures should ensure compliance when operating digitally.

Maintain confidentiality

Trustees and other fiduciaries owe duties of confidentiality under statute and common law. Measures are needed to ensure compliance when, for example, conducting videoconferences and arranging electronic signatures.

Comment

In many cases, patriarchs and matriarchs will strongly advocate the status quo on matters such as physical meetings, and this should remain the default option for most families.

However, it can no longer be assumed that structures can always run on the traditional basis. Structures should therefore be reviewed to ensure that they are digital ready.