A news story that’s been circulating involves Nicolas Puech, an 80-year-old billionaire who’s a fifth-generation heir of Thierry Hermes, who founded the luxury fashion house Hermès. According to various reports, Nicholas, who’s unmarried and childless, has started legal proceedings to formalize the adoption of his 51-year-old gardener, which would enable his gardener to inherit a large share of Nicolas’ fortune. Nicolas’ motivation for this action seems to stem from a falling out with his family after a rival company purchased a 23% stake in Hermès in a hostile takeover bid. Nicolas subsequently resigned from the board.
Nicolas had previously pledged his fortune to the Isocrates foundation, which he established to combat misinformation. According to an article in Fortune, the foundation says it will oppose any cancellation of the inheritance contract.
This situation illustrates that when it comes to family businesses and succession, a lot can go wrong. What could have helped this family avoid these conflicts? Let’s explore some of the issues involved.
Adopting Adults
According to Kristen A. Curatolo, a partner at Seward & Kissel LLP in New York City, if this type of adoption were attempted in the United States, it might not pass muster. She notes that many states place restrictions on when adults can be adopted. For example, some states require a parental relationship between the adoptive parent and the adoptee and that the parental relationship be sustained for a specified period of time.
Curatolo explains that to prevent gamesmanship with adoptions, trust agreements may exclude from the definition of “descendants” any individuals who were adopted after attaining age 18. Also, with the prevalence of advanced reproductive technology, practitioners may consider limiting who’s considered a genetic child of a parent who was deceased at the time of conception (for example, a frozen embryo could be used to conceive a child after a parent’s death). In this circumstance, the trust agreement could require written permission of the deceased parent that their genetic material could be used to conceive a child after their death to avoid unintended beneficiaries.
Family Business Challenges
Curatolo notes that business succession planning is key to keeping family harmony. For closely held businesses, voting agreements could be designed to ensure that each family line’s interest is proportionately represented.
Another challenge for family businesses is that they tend to focus exclusively on management, rather than family dynamics, says Patricia Angus, a family enterprise consultant in Washington, D.C. and an adjunct professor at Columbia Business School in New York City.
But at the end of the day, the power and control over a business rest in the owners. With the majority of businesses owned by families, what happens within the family ultimately impacts ownership and therefore the fate of the business. When ownership succession must stay within family lines, this creates pressure and restrictions on family members, especially those without children.
The practice of adopting adults as children has been used in the past by members of wealthy families to enable an inheritance that wouldn’t otherwise be possible. That a family member would have to go to such an extreme to exert control over the disposition of their assets shows an important limit on the "freedom of disposition" inherent in common law. There are other ways for families to resolve these issues--it behooves a family to openly discuss its norms and develop governance practices that are inclusive and flexible.
