Outraged by the Great Depression in Wall Street, the federal government has taken both legislative and regulatory action, many of which it fears will lose its mark. Instead of making investors more confident and making their businesses more efficient, there is a prospect that new laws, their related regulations, will hinder decision-making and divert attention from core business activities. While much of the new regulation targets large public companies, there are some implications for family businesses and family offices that may be noted.
As always, the concern following this phase of the new legislation is that the real consequences of those rules will come to fruition. These fears are exacerbated today by two somewhat unique factors. The first is the skeletal nature of the Dodd-Frank Wall Street Reform Consumer Protection Act, which left the SEC and other regulators to figure out how the law would be implemented in most cases. Second, the recent elections, which shifted the balance of power in Washington, effectively raised more questions about what the law of the country will be in the end.
Prudent business practice prompts us to prepare for both the expected and unexpected consequences of government action. Thus, in that spirit, it may be helpful to take a closer look at some of the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010. on July 21. Or, as the name implies, the law addresses consumer protection, trade restrictions, and financial regulation, it also contains significant new corporate governance requirements that can directly affect family businesses.
Consequences: Intended or not?
As an example of how these decisions may affect family-owned businesses in Dodd-Frank, the SEC has clearly defined a single-family office “multi-family service office” in clarifying reporting requirements for family offices. As a result, family offices that have been opened to other families to share their services and the costs associated with providing them may be excluded from presenting themselves to the public as investment advisers. If the SEC in 2010 Based on the October 12, 2009, decision that the Family Office actually offers investment advice to the public, it will be required to register with the SEC in accordance with the provisions of the Advisers Act of 1940. Previously, consultants with less than 15 clients were exempted from the provisions of this Act. However, the new legislation removes the exception և the possible result is that only one family offices will be able to avoid registration և reporting. Hedge funds, rather than family offices, were likely to be the target of these changes, but the result still forced the SEC to develop a family office definition that seemed more restrictive.
Consequences of such unintended consequences, of trying to clarify or rectify laws and regulations, can often cause the most difficulty, precisely because no one has seen the problem before. While some of them may have a direct impact on the family business, as in the case of family offices, others may have a more systemic impact. For example, after the adoption of Sarbanes-Oxley, public companies were required to disclose more information and significantly expand their paperwork in the SEC. Most of these documents have become so prevalent that they have affected the claims of banks և other financial institutions from all their customers, complicating the process of securing credit lines and other loans for private companies.
One of Dodd-Frank’s most debated և potentially far-reaching provisions concerns proxy entry. Shortly after the law was passed, the SEC approved new rules that allow shareholders to enter a public company proxy to add their candidates to the company account to be elected to the board of directors. There may be restrictions on how many shareholders may be nominated by shareholders over those chosen by the company’s nominating committee, but this change sends shockwaves through corporations. An investor or group of investors only needs to own 3% of the company’s voting shares in order to apply this provision to nominate up to 25% of board members. This is a relatively low threshold for many pension funds, trade unions and other activist shareholder groups that have their own agenda. Such a small percentage can be a deterrent to family businesses that have sold at least a small portion of their shares through a public offering.
It will certainly discourage many family companies from entering public markets to raise funds to grow their business, effectively cutting off a potential source of investment capital. Any family business planning a public offering in the future should carefully consider the possibility that they may open their board to dissident groups whose agenda is set by minority owners outside the family. Proxy access will also provide new ammunition to those who wish to challenge the classification of stocks in a way that allows families to maintain control over voting. The New York Times Բար Barnes և Noble have been the target of such attacks in the recent past.
Even small companies that are defined as companies with less than $ 75 million worth of shares sold on public markets will abide by this new proxy rule. However, the SEC suspended the use of small companies for three years to allow time for the study of the rule to apply to larger companies. Therefore, it is very likely that the family businesses owned by this small company will start planning their strategy for this new threat, which should be prepared in a short time. Possible strategies may include stock repurchase plans այլ other mitigation measures by the end of three years.
Compensation և Say-on-Pay:
Or it is not a direct threat to control, but payment on payment represents a potential intrusion, a disruption to the management of a public trading company, even if the controlling interest belongs to the family. This part of the regulation requires that shareholders have a non-binding vote on executive compensation at least every six years (possibly more often by a shareholder vote). Whether or not mandatory voting will not directly affect executive compensation, it has the potential to give a higher voice to dissident groups who do not understand or care about the competitive environment in which the company operates. This process will undoubtedly be another reason why family businesses can avoid raising capital through public offering of their shares, as many have done in the past.
Impact on family business
Given the above issues, the unintended consequence of Dodd-Frank’s SEC rules implementing it may be to close a potential source of growing capital for family-owned enterprises. Families have always had to carefully consider the pros and cons of selling some of their shares on public markets for privacy reasons. There is a real danger of control now, even if a minority of shares are traded և many may not go that route, even if it means slow growth և missed business opportunities.
It may also be recalled that even family businesses that do not sell any shares on public stock exchanges are likely to be affected by the ongoing development of new regulations as a result of the Dodd-Frank Act. As in the case of Sarbanes-Oxley, banks and financial institutions will adjust their processes and practices to comply with new public company regulations. This will undoubtedly mean that family businesses need to respond to the challenges posed by public companies simply because they have become part of the business of financial institutions. These companies may start anticipating these changes, working with their bankers, accountants, lawyers to be prepared.
Of course, not all the consequences of these changes are bad. The SEC aims to develop new regulations to meet Dodd-Frank’s intentions by promoting effective “accountability” between the company’s shareholders, owners, directors and executives. These are important goals that any business family should pursue. Trust and harmony between the family is built և established through transparency between family business owners և intended owners. What Dodd-Frank seeks to impose on public companies in terms of compensation practices հաս access to shareholders can be used to maintain the patient capital that family businesses rely on.