Kevin Schembri Orland
The Family Business Act will be distinctive not only in its legislative scope and intention, but unique to the legal community on a European and International level, Economic Minister Chris Cardona said yesterday.
Minister Cardona was addressing a conference at the Malta Chamber of Commerce titled 'Business Transfers: Effective Policy & Support Measures'.
"The scope of our unique legislation is to assist and facilitate the transfer and ownership of the family business from one generation to the next without hindering the continuity and development of the business. Indeed, we want to encourage development," he explained.
"While this allows for a wide vision, the disadvantage lies in the fact that accurate and tangible research, statistics and data are either negligible, non-existence or irrelevant. Research, statistics and data need to be gathered not only at inception but also during the operational stage to monitor the growth, success, or failure of the legislation.
"To date no other member state has formally recognised in standalone legislation the transfer of a family owned and run business to the next generation, as we in Malta are proposing".
Nationwide beneficiaries
The beneficiaries of the legislation will be span the nation as nearly the entire business community could potentially be eligible to benefit from this legislation, the Minister revealed. "In addition, we must recognise that foreign family businesses, who opt to register their business in Malta, will also become valid beneficiaries," Dr Cardona said.
"It's clear that the government's role has to be designed with regard to the financial impact it will have on its annual deficit. I'm saying that just in case the Finance Minister is sitting in the audience," he quipped.
This legislation is a first in the EU, the Minister said.
"People in this type of business appreciate the benefits that come from a family unit working together. There is a special bond, a trust, an understanding. And, of course, a common endeavour."
The Minister mentioned some of the more common governance problems that arise within family businesses, including succession and dependence on its owner, an unwillingness to relinquish control when it would benefit the business to do so, internal family conflicts and nepotism.
Other concerns include restrictions on shareholders, the different classes of shares etc, he explained.
Family structure weakens through generations
"Although family participation is critical for business growth, the family structure itself weakens as companies enter their third or fourth generation. This, of course, hampers growth," the Minister added. In generation one, the owner manages the company. In generation two it is largely the sons and daughters. In the third generation, "it gets complicated".
"Often the challenges posed by 'family expansion' are exacerbated by the fact that family constitutions are rare. A family constitution is an especially sensitive issue in second or third generation families where the founder is still alive and succession is an issue and as a result many families have informal verbal codes or understandings that guide their businesses".
A main problem arises when in the third generation, people begin moving away and starting their own companies, he explained.
"A number of families are finding ways to address the issue of youth flight: some companies are using stock offerings as a way to reorganise power and wealth across a growing family empire. In fact, listing on a stock exchange would give some of the third generation the option of cashing out".
Confidence among family businesses on the rise
The Minister believes that confidence in market conditions among the family business community is clearly on the rise and visible from survey results. "This year, more respondents have been willing to state their view as positive, as opposed to neutral, and for this market segment, all the signs point to market confidence returning even with a war on talent playing out in the background".
There are many reasons for increased confidence, not least the changing funding landscape, he said: "Access to finance and credit is no longer as big a concern as it was six months ago. A willingness to re-invest profit and the ability to secure bank funding is on the rise".
While drawing up the legislation, the government has been looking at the European Union's view on business transfers. "They are encouraging the creation of legislation and a framework of transfer-friendly regulation," Dr Cardona said.
The Minister revealed that plenty of suggestions from the European Commission exist and the government is taking them on-board as they develop legislation.
"Financing is, obviously, important. Guarantees for equity or quasi equity fund investments in SMEs should include investments by local or regional funds which provide seed capital and/or capital in the start-up phase, as well as mezzanine finance, in order to reduce the difficulties which SMEs face due to their financial structure, and those arising from business transfers."
Operating such an innovative structure entails significant costs both from a human resource, physical resources and capacity building perspective, the Minister explained. "A regulator or manager will coordinate and administer the legislation, its functions and duties".
A number of other speakers also took part at the conference, including Ms Therese Zahra, Press and Political Officer, European Commission Representation in Malta and Mr Frank V. Farrugia, Vice President, Malta Chamber and Chairman, SME and Family Business Committee.