Du Qin, global headquarters partner at Beijing Yingke Law Firm Shenzhen Office, shares her perspective on the role that law and legal frameworks play in family succession, at the Wealth and Society 2021 conference in Shanghai.
In this session, Du Qin, partner at Beijing Yingke Law Firm talked about how families maintain and grow family wealth over generations. She shed light on current laws and legal frameworks to ensure successful wealth transition. She spoke about the challenges families face in intergenerational wealth transfer and how to efficiently manage family wealth and business during unforeseen events, like death and/or bankruptcy.
Below is the edited transcript:
Hello, everyone. I am Du Qin, a lawyer from the Yingke Shenzhen Office. I would like to thank “Wealth and Society” for giving me this opportunity to speak to you. Family inheritance consists of three aspects: the continuing relationships between family members, inter-generational wealth transfer, and succession of business operations and management.
Inheritance is a continuous, dynamic and systematic planning process, wherein ensuring solid implementation is the most critical. Thus, the law with an inherent mission to ensure order and regulate behaviour is needed.
The legal framework offers a basic foundation and support for family inheritance planning, while legal technicality is the basic guarantee for family inheritance planning. When we talk about wealth management and family inheritance, we talk about many financial tools and systematic planning. Today, I will speak about the role and function that law plays in wealth and family inheritance which often gets ignored by many.
Let me take the family business and its inheritance as an example. So, family inheritance mainly consists of three aspects. First is the continuity in the operation of the family business, which inevitably includes ensuring a good quality of life for the family members, stability in family relationships, and stable operating cash. Despite the changes in the external factors, for instance, changes in domestic or international policies, industry-wide changes, or family members encountering unforeseen accidents, the normal operations of the family and the business must continue without major disruptions.
We must divide existing assets and ring-fence part of these assets We also need to develop a plan for unexpected circumstances. In this case, the segregated assets are usually managed in the form of an agreement, clearly demonstrating the complementary relationship between such agreements and trusts.
According to the law in China, property is co-owned by husband and wife. When either party handles trusts, usually one party assumes the main role. The terms of disposal of the assets under such trusts in the future need to be specified through an agreement between the couple for it to be enforceable by law.
In addition, in practice, accidents are most easily overlooked in family and business operations. When accidents happen, for example, when family members go missing, are found unconscious or dead, who will take over the operation of the family and the business? In the event of such unforeseen accidents, if there is no prior arrangement, who will take care of the family and the business? Usually, it is the spouse. But is the spouse the most suitable person? Why is it the spouse? Actually, from a legal perspective, the spouse is the first-lien legal guardian. If the wife does not have the ability, or if she is not the most appropriate person to manage the business, will it be very difficult for her to maintain the stable operation of the family and business?
Some may wonder why should it be the guardian? Isn’t guardianship something that remains in family and life only? Guardianship is a broad concept. We need to start with the meaning of guardianship, which covers people, things and behaviours. We all know that the equity of enterprises is a special category of assets; it includes people and capital, as well as property and rights. Equity of the enterprise as an asset must be managed by those who manage assets, and wealth management is one of the important aspects of guardianship. Therefore, guardianship comes within the scope of enterprise management and plays its role in enterprise management and operation. This is the aspect of guardianship that we may be unaware of.
We would probably think that if the legal guardian is inappropriate, can we change the guardian to someone that we think is the right person to manage the business? Of course, we can. Legally, it is called “intentional guardianship”. This means that I can, out of my own subjective will, appoint someone as the guardian, as long as this person agrees. We can appoint a guardian by signing a guardianship agreement, entrusting someone to make arrangements relating to all our assets including equity and exercising actual shareholder rights and enterprise management rights. Of course, we can also solve the problem by long-term authorisation. We need to understand the complementary relationship between authorisation and guardianship, the differences between them, and their governance. The reason we discuss the concept of intentional guardianship is that many entrepreneurs overlook it.
Next, we will talk about how to develop the enterprise sustainably. Entrepreneurs may engage in various risky behaviour, or innovative behaviour for better development, including making some risky investments for the expansion of the enterprise. So, compliance with laws and regulations is the baseline. This baseline needs to be established by the law, which every entrepreneur should adhere to. Meanwhile, we know that if an enterprise is mismanaged, debts are the last straw to break it. Often, debts cause abnormal operations of the enterprise. Therefore, debt management becomes a crucial aspect of risk prevention.
I am from Shenzhen. Shenzhen has adopted the Regulation of Shenzhen Special Economic Zone on Individual Bankruptcy. Such regulations will be implemented throughout the country in the future. We need to know what personal bankruptcy means when it comes to debt. We need to understand the impact personal bankruptcy has on the management of entrepreneurial debt, and the possible impact of business debt (through shareholder debts) on the family debt management. We also need to understand family debt management, and how family assets might be used to pay off the personal debts of shareholders. You can see that business debts, personal debts, family debts are intertwined with business and family assets. How to define the limits? This is why law and legal safeguards are necessary.
The last aspect I want to address is inter-generational inheritance and business succession. A voluntary succession is the best. We often say that business succession is extremely dangerous. Why? Imagine that an entrepreneur is driving a car at a high speed. How would he want to proceed with the succession? In a high-speed car, the next generation is watching him drive in the passenger seat, and now this next generation needs to be in the driver’s seat, and the car needs to maintain its original high speed. Isn’t this very dangerous and difficult? Absolutely. Therefore, the succession must not be carried out passively. Preferably, it should be a gradual process, and this process should integrate with and complement the aforementioned inheritance processes. All these should be set up and organised together.
When we design the process, we also need to have a passive succession as a backup. In case of accidents, what kind of approach should be adopted to ensure a smooth succession? This backup plan is very simple. It is the will. Under any circumstances, the will makes stipulates all the issues and assets before he pass away as well as everything the testator cares about for the future. Therefore, through the will or by establishing a will, we can reinforce family wealth inheritance planning. With such a perspective, it would be easier for us to establish a well thought out inheritance process in reality. Regarding with establishment and execution of the will, there are many systematic changes to the new Civil Code, including inheritance rules regarding the administration of inheritance. This will undoubtedly have important impact on family inheritance.
Today I just touched upon some legal technicalities that we might encounter and that we need to pay attention to. There is more that we need to do. I hope that I will have another opportunity to speak to you in the future. This is all I have today. I also hope that when planning family inheritance, we all understand that it is the systematic, all-around, multi-disciplinary and multi-dimensional planning, and the law is the baseline for everything and the number one consideration. Thank you.