How Capacity Can Impact on Efforts to Create a Decision Making Tree – Hull on Estate and Succession Planning #151

February 12, 2009 Hull & Hull LLP Hull on Estate and Succession Planning, Podcasts, PODCASTS / TRANSCRIBED, Show Notes Tags: , , , , , , 0 Comments

Listen to How Capacity Can Impact on Efforts to Create a Decision Making Tree

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss how capacity and one’s capacity can impact on efforts to create a decision making tree.

If you have any comment, send us an email at hullandhull@gmail.com or leave a comment on our blog.

 

 

How Capacity Can Impact on Efforts to Create a Decision Making Tree – Hull on Estate and Succession Planning #151

Posted on February 12th, 2009 by Hull & Hull LLP

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag. These podcasts will provide information and insights into estate planning in Canada. From the offices of Hull & Hull in Toronto, here are Ian and Suzana.

 

Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening to episode 151 of our podcast on Tuesday, February 10, 2009.

Ian Hull: Hi Suzana.

 

Suzana Popovic-Montag: Hi there Ian, how are you today?

Ian Hull: Great thanks.

Suzana Popovic-Montag: That’s good.

Ian Hull: So continuing on with our discussion about the corporate issues and sort of some of the fall out of some of those expectations with clients, I thought I would react to a question that we got in and remind everyone that please feel free to obviously go to our daily blog. Our e-mail address is hullandhull@gmail.com and then our daily blog is at estatelaw.hullandhull.com. 

And one of the questions that was sent to us and I thought it was sort of an interesting starting point to where we’ve been directing our discussions is the whole question of really how capacity and one’s capacity can impact on efforts to create a decision making tree.   And what I’m getting at there is, is that our shareholders’ agreements that we’ve talked about and encouraged our clients to develop and work through create a decision making tree typically. And we can talk about how that tree is set up today but one of the overlying facts is that if you’ve done all this hard work to create an ability to have some consensus building, decision making impact from everyone approach, what happens when the head or the heads of the family does not have capacity or is starting to lose capacity? 

And so what I thought we’d do today is talk about first of all, let’s start with the decision making tree and what are some of the considerations you might put into your shareholders’ agreement. And then sort of overlay some of that comment on how we struggle with questions of capacity.

Suzana Popovic-Montag: And Ian, really within this forum when we’re talking about, you know, this openness, this communication and speaking with family, it sort of makes sense to segway these kinds of considerations as part and parcel of this whole planning, I think because while you’re demonstrating to individuals how it is that you’d like to see things unfold, you can also dovetail in these considerations of what you’d like to see happen if you can no longer be in control or you can no longer direct that process. So I think it really lends itself well to the whole forum while this is being discussed at the same time.

Ian Hull: So the first question is, who is going to make the decisions and how do we effect that decision making tree in the context of what happens if that person is (a) unable to maybe with lack of capacity or (b) isn’t in the country anymore, goes down to Florida for 6 months. The whole question of decision making and so forth and there are different models. And one of the models that can be effective is the transitional decision making tree where you put the President in, one family member is a President for 2 years and then the Board of Directors votes in whether or not the President should be removed and replaced by another family member. Or you have automatic revolving presidencies in the family holding company or the operating company, that kind of thing. Or you allow for some sort of Chairman of the Board role for the head or the heads of the family.  And you allow some super powers within that role which maybe discretion. For example, the head or the heads of the family can be the only one who decides ultimately whether or not the company may borrow. Or they may decide whether or not the company may sell shares and so forth. And then trickle down to the President who will have day-to-day operational decisions. Those are the kinds of things. Who are making the decisions, what decisions need to be made. All of that has to be carefully sort of considered in the context of what kind of business you’re running.

Suzana Popovic-Montag: Now how would Powers of Attorney or guardianship appointments fall into that model according to the way that you’ve just described that?

Ian Hull: Well I think that’s a good question. And I’m not sure that it would be sensible in a lot of cases to do just the blanket Power of Attorney. And sometimes a really well-drafted, refined Power of Attorney is very effective where you then don’t give blanket control away, but you give specific control away. And that helps you; I mean again, some of these considerations, you know, let’s look at basic corporate law. If you’ve got a corporation and you’ve got shareholders, what’s sufficient for quorum? What’s sufficient for lending powers? What’s sufficient for some of the core financial decisions you’re going to have to make in terms of participation? And you may want to tune the Power of Attorney document and fine-tune it to reflect on some of those issues that you know and you can anticipate.

So if you’re in a business where you are buying a lot of inventory and you are going in and out of lines of credit regularly, is there a reason to have you know a super power role of a CEO in there and so forth.

Suzana Popovic-Montag: That’s good. 

Ian Hull: So one of the other things that we struggle with and the question of the Power of Attorney ties into this as well is, are we looking for unanimous vote or are we looking for majority rules? Are we looking for, as I said earlier, some sort of super power rules? And those are the kind of considerations again we want to look at. Not as much on the capacity issue because if we fine-tune or create our Power of Attorney well enough, but in an Power of Attorney document we will often see more than one attorney. And does that make sense when you may have in your shareholders’ agreement the requirement for unanimous agreement? Maybe it’s a unanimous shareholders’ agreement in terms of voting on certain things, and yet on the Power of Attorney side, you are allowed joint and several decisions. And you might be splitting the decision making tree inadvertently because you’ve created a Power of Attorney document, the head or the heads of the family or someone within the shareholder group has become incapable, yet you haven’t corresponded it to the shareholders’ agreement. So careful consideration needs to be given to the nature and effect of your Power of Attorney and how it will impact on not just operations but how it will impact on the shareholders’ agreement itself.

Suzana Popovic-Montag: And then it sort of underscores the fact that even though there’s so much flexibility that we can build into these documents that are being drafted, the Powers of Attorney, the shareholders’ agreements, nonetheless you want to make sure that they work together well because that’s one of the main purposes of doing it and to make sure that they can co-exist, so to speak, if something were to happen when they have to be called upon.

Ian Hull: Absolutely. And so one of the other mechanisms to break a deadlock that is, and these are just sort of ideas that it depends on each individual situation, but one suggestion I’ve seen used effectively is a compulsory, mandatory ADR or arbitration clause. And one of the triggers on that could be issue by issue. So that if you have a group, for example, a family member. You’ve got parents who are able-bodied and two children and you provide for a deadlock clause in the Power of Attorney. So the parents unfortunately both lose capacity as they age and the children are left with the role as attorneys. You can set up; I’ve seen very effectively, an arbitration clause issue by issue. So you say you put in writing that it has to be…say there’s an issue that needs to be decided…you put it in writing to the other side. So the sister says look, I want to decide whether or not we’re going to go public. And the parents are both incapable, you’re both co-attorneys, you’ve corresponded it to the shareholders’ agreement and you say the mechanism is as follows: the person who has an issue or a problem must write to the other person, set out the issue and within 7 days you have to set up a mechanism or something like that that kicks in an arbitration or mediation process. And you can do it issue by issue so that it creates the tension really focusing on one issue as opposed to the global. Because most of the operational questions aren’t going to be problematic but if you can create sort of a side process with an issue by issue arbitration, mediation clause, it can be an effective tool. And also it gives people the threat that that clause could be used at any and all times and therefore we better behave and look for consensus before those clauses are enforced.

Suzana Popovic-Montag: That’s right.

Ian Hull: So that’s just a nice, you know, illustration of how we can use these break the deadlock clauses. 

So I think that’s really…I hope that we’ve answered the question that was asked talking about the capacity issues and how they overlay in the decision making tree and the shareholders’ agreement context. And we appreciate the question. We’re always looking forward to input at hullandhull@gmail.com.

Suzana Popovic-Montag: Or feel free to visit our blog at estatelaw.hullandhull.com.

You have been listening to Hull on Estates and Succession Planning by Ian Hull and Suzana Popovic-Montag. The podcast you’ve been listening to has been provided as an information service. It is a summary of current issues in estates and estate planning. It is not legal advice and you are reminded to always speak with a legal professional regarding your specific circumstance. To listen to other Hull & Hull podcasts or leave any questions or comments, please visit our website at hullestatemediation.com.

 

 

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