Compliance and marital crisis management in couple-owned companies

By Chen Fengxia and Cao Yan, DOCVIT Law Firm 
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The China Stock Market & Accounting Research data of actual controllers of listed private enterprises from 2003 to 2015 found that, after excluding financial sector companies and delisted and special treatment companies, there were 178 listed “husband-wife owned” companies among 1,474 private enterprises, accounting for 12.06% of the total number of private companies.

陈凤霞, Chen Fengxia, Partner, DOCVIT Law Firm
Chen Fengxia
Partner
DOCVIT Law Firm

Some of these experienced turmoil due to spousal relationship changes, before or after the IPO. As these couples become locked in a fierce struggle surrounding their relationship, so their companies, too, suffer turbulence and damage.

The main issues

In husband-wife owned companies, couples usually fail to pay enough attention to corporate governance rules and their property arrangements in the early stages of their entrepreneurship. Then, during development or even after the IPO, such companies can often fall into financial plight or control struggles due to the collapse of their marriage relationship. Such cases are numerous, but there are three basic issues:

Corporate shareholding and control arrangements. At the start of the business, couples fail to figure out their share arrangements in the company and clarify their control rights. With changes in their roles and in their relationship, and with the continual development of the company, hidden dangers may be brought about for the company.

Corporate management system. Inadequate management of the company and a lack of arrangements for coping with crisis in the couple’s relationship may lead to disputes and turbulence over control of the company with the changes in the couple’s relationship.

Couple’s division of labour and role awareness. Even if the couple have made a clear division of labour between them in the company, they may still overstep their authority and lack strong role awareness. Changes in the relationship between the couple, as the founders of the company, may affect the management of the company. A good relationship between the two may naturally promote the development of the company, while a deterioration or breakdown of the relationship can have a great negative impact on the company.

Corporate governance and marriage

The corporate governance of a husband-wife owned company involves not only the shareholding and control of the company, but also the common property of the family, and the relevant laws and regulations also leave certain space for autonomy. The successful business of husband-wife companies such as Nine Dragons Group, operated by Zhang Yin and her husband Liu Mingzhong, and Prada Group, founded by husband Patrizio Bertelli (CEO), and wife Miuccia Prada (chairman of the board of directors), shows some pattern for others to follow. The authors suggest considering the following factors:

Make the most of legal space for corporate autonomy and marital autonomy.

(1) The role of the articles of association in the company’s regulation and governance should be given due attention. The shareholding and control rights between the couple should be clarified in the articles of association, including sound arrangements for shareholding and control of the company in case of marital crisis, or even marriage dissolution;

(2) Some husband-wife owned family businesses even stipulate the building of a family ethos in the “family business charter” to institutionally strengthen the spirit and lifeblood of the family business’s operation and legacy; and

(3) The ownership of the couple’s property should be clarified by prenuptial and postnuptial agreements, including the company’s shareholding arrangement, the scope of the couple’s agency in family affairs, the commitment of the couple’s joint debts, and the handling of the company’s shareholding in case of marital crisis or dissolution.

Both the articles of association and the marriage agreements are fine strategic arrangements. In practice, these arrangements are often examined by the company’s investors, or the board of directors.

Corporate governance, internal rules

Company operation and family relationships should follow their respective logic and rules, so that “company matters follow company rules and family affairs are handled pursuant to the family law”. If both the husband and wife engage in the business management, they should clarify their roles according to their respective specialties and support each other.

Husband-wife owned companies should keep improving the corporate governance, pay due attention to developing management norms and rules, nurture modern corporate culture, and commit to compliance management, which is conducive to gaining the trust of stakeholders such as investors, employees and partners, and promoting the healthy and sustainable development of the business.

曹雁, Cao Yan, Partner, DOCVIT Law Firm
Cao Yan
Partner
DOCVIT Law Firm

Wisdom for marriage

As the business management and family relationship are intertwined with each other in husband-wife owned companies, the couples need wisdom for managing their intimate relationship.

There are two concepts of social exchange in economics – one is reward, the pleasing experiences and goods we get when we are in contact with others, including materials, emotions, care and help. The other is cost, punitive and unpleasant experiences. The most important cost in an intimate relationship is psychological burden. When couples lack rewards, the costs often tend to be shifted to work and family relationships.

Marriage is a dynamic process, and it is not a once-and-for-all guarantee for all matters. There are two other measures in economics applicable to marriage. One is expected return. Marriage satisfaction = outcome minus expected return. If the outcome is lower than the expected return, then the marriage satisfaction is low. If the outcome is higher than the expected return, then the marriage satisfaction is high.

The other measure is called replacement return. It refers to the result of abandoning one’s current partner for a better one. Many couples are able to share weal and woe, but not wealth. These are marital crises that couples should be aware of.

At different stages of company development, the husband and wife should make relevant arrangements integrating family happiness, risk management, corporate governance and compliance management. This is a dynamic process of making overall planning and strategic management, focusing on shareholding, control rights, crisis management for financing, IPO, introduction of professional managers, family business operation/inheritance, wealth management and other important aspects, so that company development and family happiness can mutually facilitate each other, and truly develop a long-lasting business.

Chen Fengxia and Cao Yan are partners at DOCVIT Law Firm

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