A family investment company (commonly known as a FIC) is not a distinct legal entity created by special legislation.
It is usually a private company limited by shares, incorporated under the Companies Act 2006 with a constitution and share structure that has been constructed or adapted to hold and manage family investments in a tax-efficient manner for generations of family members.
That familiar corporate form offers flexibility, but it also brings legal duties, filing obligations and the potential for disagreement if the arrangements are not carefully documented. Our Corporate Lawyers examine the key considerations.
Family objectives
Before incorporation, the family should discuss and agree the following:
- What the company is intended to achieve (which is often linked to succession and/or tax planning)
- Who should control investment and distribution decisions (usually the founders of the FIC being the parents in a family dynamic)
- Which family members should benefit from the structure (usually this will be children of the founders of the FIC or other future generations); and
- How the structure should respond to death, incapacity or a change in family circumstances
These questions shape the company’s constitution (comprised of the articles of association and any shareholders’ agreement) and share class structure.
Tax and succession planning are commonly important reasons for establishing a FIC, so specialist tax advice should be obtained before the legal structure and documentation are finalised.
Articles and share rights
Model articles are not appropriate for a FIC because they do not cater for even the most straightforward issues that arise in a multi-generational FIC.
Instead, bespoke articles of association can allocate voting, dividend and capital rights between different classes of shares; regulate director appointments; impose transfer restrictions; and identify decisions requiring enhanced shareholder approval.
A key distinguishing feature of a FIC’s structure is the separation of control from value.
FICs are usually designed to allow parents, as founders, to pass value to younger generations without immediately relinquishing control over how the company’s assets are invested or distributed.
The articles of association are the “rule book” of the Company, so the provisions must be consistent with the intended share classes.
A label such as “growth share” or “non-voting share” does not itself determine the legal rights attached to it. These are set out in the articles of association.
Any later variation of class rights, issue of shares, reduction of capital, redemption or buy-back must follow the Companies Act 2006, the articles and the required corporate approvals and relevant consents.
Where the structure does change in this way, this may prompt updating the articles of association to reflect the new arrangements.
Directors’ duties still apply
Family relationships do not displace directors’ statutory duties.
Directors must, among other things, act within their powers, promote the success of the company for the benefit of members as a whole, exercise independent judgment and reasonable care and manage conflicts of interest.
A director should not simply follow the wishes of the family member who appointed them. Investment decisions, loans, dividends and transactions involving relatives should be considered at company level, with conflicts declared and approvals obtained where required.
Clear board minutes for these key decisions can help demonstrate how decisions were reached and show that due process has been followed.
Using a shareholders’ agreement
It should be noted that the articles of association are publicly available at Companies House, and therefore it might be appropriate to have a shareholders’ agreement which can address matters better kept private.
These matters include:
- Reserved decisions (dependent upon the shareholding arrangements and balance of power)
- Information rights
- Dividend policy
- Funding arrangements
- Dispute resolution
- The process for a family member leaving the arrangement.
The agreement and articles should be drafted together: the articles bind the company and its members as a statutory contract, while a shareholders’ agreement binds only its parties and cannot override the Companies Act.
If a shareholders’ agreement and the articles conflict, this can cause real issues when trying to determine what should happen in certain circumstances.
Plan for succession and personal events
The company constitution (articles of association and the shareholders’ agreement) should work with the shareholders’ wills and estate planning.
They should address what happens when a shareholder dies, loses mental capacity, divorces, becomes bankrupt or wishes to transfer shares.
Relevant provisions may include pre-emption rights, permitted transfers, valuation mechanisms and compulsory-transfer events.
Care is needed where minors or trusts may hold shares, because ownership, voting and decision-making may operate differently.
Powers of attorney and the future composition of the board should also be considered so that the company is not left unable to act.
Review the structure as circumstances change
Governance should be revisited when investments, family relationships, capacity or succession plans change.
Board composition, signing authorities, share rights and transfer provisions may all need adjustment, but changes should always be made through the correct corporate procedures rather than by informal agreement.
Is a FIC Right for you?
Our Corporate and Private Client teams regularly advise families on the creation, governance, and tax structuring of FICs. We work closely with accountants and financial advisers to ensure the structure is right for your personal circumstances.
If you are considering setting up a FIC or would like to understand whether it may be suitable for your family, please get in touch with our specialist team.
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Luke Wilkins
Associate
Luke has over 2 years of experience acting as a Corporate solicitor. Luke has specialist expertise in mergers, acquisitions, and disposals, as well as providing corporate support to our insolvency and restructuring team.
About Luke Wilkins