Hogan Lovells Asia Pacific – Spotlight on Private Wealth: resolving family conflict

Hong Kong is home to some of Asia's richest families. The combination of an entrepreneurial culture, low tax rates, and a thriving economy have seen the wealth of many Hong Kong families soar in recent decades, with nine Hong Kong families appearing on Forbes Asia's list of Asia's richest families. According to a survey quoted by a senior executive director of the HKMA in September 2020, there are more than 80,000 ultra-high net worth families in Greater China, a 20 percent increase over the previous three years. ¹

Yet family wealth brings its own share of challenges. Many family-built businesses were constructed in the years after the second world war and are now addressing challenging issues such as transitioning the business and estate/succession planning. A well-known Chinese saying is that "wealth does not survive three generations" (in fact variations on the same saying are seen the world over). Whether it be inheritance disputes or family power struggles, Hong Kong's wealthiest families have made their share of news in the past few years.

Unfortunately, the potential for disputes to arise within families and between families and third parties is always there. In many cases, a desire for privacy and past-generational control over the family business means that it is not always clear where assets are located, what they are worth and whose control they are under.

With livelihoods and personal relationships at stake, preparation and planning is the key to avoiding family disputes. Where they cannot be avoided, the need to minimize emotional distress, maintain harmony, and prevent family funds being exhausted through legal battles is vitally important. 

In the first of a series of articles, we highlight five aspects to consider should disputes arise.

Knowledge is power

It is important to maintain a list of all assets and where they are located, whether any of them are charged/pledged as security and how easy it would be to access the assets should the need arise. Try to get a ballpark figure to start with. More exact information can follow later.

Also, make sure that you maintain an up-to-date organizational structure. A typical family business structure will involve complex layers of onshore and offshore structures spread across multiple jurisdictions and often involving opaque trust arrangements. Knowing how the organization is structured will make it much easier to identify assets.

Protect and preserve

Consider how best to protect assets and counter any threat of dissipation. Legal tools can be used to preserve assets and can be obtained on a Hong Kong or a worldwide basis.

In the not-too-distant past, this might solely have included bricks and mortar, bonds, physical art/collectibles or other "traditional assets"; however, family, family business and family office demand for digital assets, such as cryptocurrencies, NFTs and other tokenized assets has boomed. This requires an innovative spin on the asset protection and preservation strategy.

Build a trusted team

Assemble your team of trusted professional advisors to identify, value and prioritize assets and to assist you to find the practical solutions should contractual or other disputes, disagreements over ownership, or unlawful dissipation, arise.  A single family representative or committee can be appointed as the chief point of contact to liaise with different family members and your professional advisors.

Your trusted team should have experience in tracking down defendants, identifying, and preserving assets, communicating with law enforcement authorities, and deploying the legal and investigatory tools required to protect and enhance your position.

Keep in close contact with them – make sure they understand your business, your family dynamic and your generational plans and are able fully to understand the opportunities and threats. Choosing professional advisors with deep knowledge and connections across multiple jurisdictions can make things easier when challenges arise in any one part of the world.

Making sure you have a team that works well together – efficiently – is critical. Too many families plunge their resources into legal and other professional costs and expenses without realizing how much it really costs until it is too late. Predictability, transparency, and certainty from your advisors should be the norm.

Keeping it in the family

Often top-of-mind for high net worth families value are privacy and discretion. Yet it is this very type of dispute that will attract attention, and often when a relationship breaks down, so does trust. This can very easily lead to otherwise confidential or sensitive information being leaked.  The old adage of "washing dirty linen in public" holds true.

Therefore, it is imperative to devise a clear information control strategy with your advisors, which can be deployed should the worst arise.

If the court resolution process will be too public, consider the benefits of arbitration. It is still a binding process in which the final decision is reached by an expert, fair, and impartial arbitrator/panel of arbitrators. Unlike a court trial, arbitration is essentially a private procedure, so that if the parties desire privacy the dispute and the resolution can be kept confidential.

Mediation

Before things get too heated, consider the advantages of mediation. Mediation is a confidential way of resolving disputes and the mediator can either be a professional or perhaps a known third party or family member. Parties who negotiate their own settlements have the opportunity to preserve their relationships.

The process is voluntary and either party may withdraw at any time. It is also confidential (unlike court proceedings) and can be much less expensive than embarking on litigation. A mediation is typically conducted in one or two days, in contrast to the months and years that may be involved in going to court or even pursuing arbitration. 

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Straight talking. Thinking around corners. Understanding and solving your issue before it becomes a problem. Performing as a seamless team, no matter where we’re sitting. Delivering clear and practical advice to help drive your business.

We are your trusted advisors. We advise across the private wealth ecosystem – from 'traditional' funds to alternative investors including family offices and individual entrepreneurs – on all of their legal needs across every asset class, industry, and geography.

From pre-fundraising through to deploying capital, including managing portfolio companies, exiting investments, and fund dissolution, as well as ensuring tax structures are optimized, we help with the complete private capital lifecycle.

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Authored by Byron Phillips and Nigel Sharman.