Family Business Succession

Somewhere in the registered office of a Nigerian family company is a document that will decide what happens to the family.

It is not the will, and it is not the trust deed. It is the articles of association — adopted in a hurry at incorporation, taken from a precedent the lawyer had on file, never read by the founder, and never revised across twenty-two years of trading. It contains the rules for transferring shares, for appointing and removing directors, and for what happens when a member dies. Those rules, and not the founder's intentions, will govern the first year after his death.

The company will be inherited under a document nobody in the family has read.

The founder is not careless. He has simply never had occasion to look at it. The articles were a formality at the beginning and have been irrelevant every day since, because for twenty-two years he has held enough votes to decide anything he wanted to decide, and no document has ever stood between him and a decision. That is exactly why the document has never been tested, and exactly why it will govern.

The essay on the second-generation question names the failure this produces: the operating business that was the family's entire balance sheet, in which ownership, management and family membership had never been separated, so that succession fell to be settled by seniority or by affection. That essay diagnosed. This one builds.

What follows is the architecture that carries an operating company across a generation: what the founder actually holds and why only part of it can be transferred, what Nigerian law does at the moment of death whether or not the family has planned for it, the six instruments that constitute a succession structure, and the sequence in which they are put in place. Every one of them is ordinary Nigerian practice. Almost none of them is ordinary in Nigerian family companies.

A founder holds three distinct things, and holds them so completely that the family never notices they are three.

The first is ownership: the shares, which are property. The second is management: executive authority over the company's affairs, which is not property at all. The third is family membership: the relationship that makes him father, uncle and head of the house. In the first generation these are one man, and the company works precisely because they are — decisions are quick, authority is unambiguous, and nobody has to ask who may commit the business.

Succession is nothing more than the deliberate separation of those three, carried out in advance. It is worth being blunt about why the separation is necessary, because families resist it as though it were a criticism of the founder.

Shares can be inherited. Authority cannot. A shareholding passes by an instrument of transfer and an entry in a register. But the willingness of a bank to renew a facility, of a customer to sign another year, of a regulator to take a call, and of a workforce to accept a decision — none of that passes by any instrument. It is re-earned by whoever takes the seat, or it is lost. The founder spent thirty years accumulating it. His successor begins with none of it, and begins in the month of a funeral.

Once the three are separated, the second generation can occupy four honest positions rather than one contested one: owner and manager, owner but not manager, manager but not owner, and family member who is neither. A succession architecture is simply a written set of rules for each of those four positions — what each may decide, what each receives, and how each may leave.

If the family has built nothing, the following happens anyway, by operation of law and of the company's own constitution. None of it is exotic. All of it is foreseeable.

The shares are property, and they devolve on the founder's personal representatives. Transmission is not transfer: until representation is granted and the register is updated, the shares sit in a condition in which nobody can confidently exercise them. Meetings that require them cannot be safely held. In a company where the founder held the majority, the company has, for practical purposes, no controlling member for as long as the grant takes — and in Nigeria that is measured in months at best.

The articles then intervene, usually in ways the family does not expect. Private company articles commonly give the directors a discretion to refuse to register a transfer, and frequently contain pre-emption provisions requiring shares to be offered to existing members before they may pass to anyone else. A founder may leave his shares to his children in the clearest possible will and find that the company's own constitution requires those shares to be offered first to a co-founder who has not spoken to the family in a decade.

Then the structural fragility. CAMA 2020 permits a private company to be formed and held by a single member, and a small company to operate with a single director — a sensible liberalisation that has quietly multiplied the number of Nigerian companies whose entire capacity to make a binding decision is one heartbeat wide. Where there were two directors and one has died, the board may lack a quorum to appoint a third. Bank mandates name signatories who no longer exist. And the facility the founder personally guaranteed does not simply continue: the lender will look to the estate on the old guarantee and to somebody living for a new one.

Underneath the corporate law sits the operational reality, which moves faster. Bank mandates fail at the counter. Suppliers holding personal credit lines convert to cash terms. Contracts of any size contain change-of-control or key-person provisions that a counterparty may now invoke, and some will, not out of malice but because their own credit committee requires it. Staff who have never been managed by anyone else begin, quietly, to take calls. Each of these is individually survivable. They arrive in the same fortnight.

Nothing that happens to a family company in the year after a death is a surprise to a lawyer. All of it is a surprise to the family.

Each instrument below is stated in terms of what it does, what it must contain, and the practical decision it forces. They are listed in the order in which they should be built, which is not the order of their importance.

Two questions sit underneath all six instruments, and a family that answers them can build the architecture in any order. A family that avoids them will build the architecture and still fail.

The first is who runs it, said out loud, in the founder's presence, to the people affected. The answer is almost always known — the founder knows, the siblings know, the managers certainly know — and the refusal to state it is understood as kindness. It is not kindness. It leaves the unfavoured with hope they will have to lose twice, and it leaves the successor without the standing that only a public appointment confers.

The second is harder: should the family still own this company in twenty years? A founder builds a business, but he was building family wealth, and the two are not the same thing. Converting an operating company into diversified capital held inside a structure is not a betrayal of what he did. In a family with no successor who wants the work, in a sector that is consolidating, or where the business depends on relationships that will not transfer, it may be the most faithful thing the second generation can do. The question deserves to be asked deliberately, once, with advice — rather than answered by drift, which answers it as no, and then as nothing.

A third question sits behind both, and Nigerian families reliably leave it until it has become a case. What is the position of spouses? An in-law who works in the business, a widow who inherits shares and votes them against her late husband's siblings, a divorcing shareholder whose settlement is a stake in the company — each is ordinary, each is foreseeable, and each is far easier to address in an agreement drafted at a time when no particular marriage is in anyone's mind. Restrictions written when they are abstract read as governance. The identical restriction proposed after a wedding, or during a divorce, reads as an accusation, and will be resisted as one.

A company is not an inheritance. It is an organisation that must be handed over. Shares pass by instrument; authority passes only by preparation.

The founder who cannot be absent for a month has not built a company. He has built a job that will one day employ his children.

The instruments are built in an order, and the order is governed by one fact: everything is easy while the founder holds the votes and impossible afterwards.

In the first year, read and rewrite the articles, execute a shareholders' agreement, agree the valuation formula, and constitute a board with at least one outside director. None of this changes who owns anything, which is why it meets little resistance and why it should be done first.

In the second and third years, vest the shares in trust, having cleared the pre-emption and covenant points; put the management succession in writing; fund the buy-sell; and move the founder from chief executive to chairman. This is the year in which the family discovers whether the architecture is real, because it is the first time somebody other than the founder has to decide something that matters.

In the fourth and fifth years, the successor runs the company while the founder is alive, present and deliberately not consulted on the ordinary business. This is the only reliable test of a succession, and it is the one step families skip, because it requires the founder to watch decisions being made differently from the way he would have made them, and to say nothing.

There is a simple diagnostic at the end of it. Can the founder be entirely unreachable for three months — no calls, no signatures, no approvals — while the company continues to trade, banks, hires, and makes a decision that binds it? If the answer is yes, the succession will hold, whatever the documents say. If the answer is no, the documents will not save it, and the work has not been done.

The instruments above are ordinary. Nigerian counsel draft them every week for companies with outside investors, who insist on them as a condition of putting money in. Family companies rarely have such an investor, and so nobody insists. That is the whole of the difference: not availability, not cost, and not law, but the absence of anybody in the room whose interest is served by asking for it.

Ownership, management and family membership are one person in the first generation. Succession is the deliberate separation of the three. All six instruments are built while the founder still holds the votes, or they are not built at all.

A company survives its founder only if it learned to decide without him while he was still there to watch.