The oldest type of business organization in human history might be a family-run enterprise. The economic environment in the GCC has grown so rapidly that there are now numerous huge corporations run by single families. These companies are crucial to the expansion, expansion, and diversification of the economy.
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It has become clear that the UAE needs a thorough and contemporary approach to succession planning in order to guarantee stability in these companies and the nation’s economy as a whole.
The following objectives have been set forth in Federal Decree-Law No. (37) of 2022 on Family Companies (“the Law”) in order to address this requirement and secure the development and sustainability of family-owned enterprises in accordance with best international practices:
- Create a thorough legal framework that governs the ownership and management of family businesses.
- Assure a seamless transition from one generation to the following, leaving a resilient legacy.
- Adopt an economic model that is more adaptable and sustainable and is in keeping with the ideals of global governance.
- Encourage the Family Companies to continue operating and to increase their contribution to the diversification and expansion of the economy.
- Reduce the dangers of fragmented management and ownership. Offer effective channels for resolving disputes involving family businesses.
- Increase the Family Companies’ competitiveness and economic impact on the nation.
Area of Law
The Law is applicable to both Family Companies that already exist and those that register following the Law’s enactment.
Any business recognised by the Commercial Companies Law, including One Person Companies LLC and free zone businesses, can be a family company.
Unless there is local legislation governing these entities in an Emirate, the Law is applicable in all the UAE’s Emirates. In this instance, the Law’s application is restricted to those areas that are not covered by the local Emirate’s legislation.
The Law does not apply to General Partnership Companies or Public Joint-Stock Companies (PJSCs).
Defining a Family Business
The term “Family Company” refers to any business formed in compliance with the Commercial Companies Law and identified in the Register as such by the Law, with the majority of its capital or shares owned by members of the same family.
It’s important to note that the Family Company is not regarded as a brand-new form to be added to the commercial company forms stated in the Commercial Companies Law.
- Any number of partners may own a family business (shareholders).
- If individuals from outside the family own the majority of the voting shares, the Family Company’s capacity will be terminated.
In all cases where a specific text has not been provided in the Law, Family Companies shall be subject to the provisions of the Commercial Companies Law and other applicable laws, subject to the laws in effect in the free zones.
Articles of Association, Family Company Register, and Constitution:
Family Companies must be registered in the Register created for this purpose by the Federal Ministry of Economy of the United Arab Emirates in collaboration with the relevant government (of each individual Emirate), which may have a separate Register to do so.
In addition to the provisions outlined in the Commercial Companies Law or the regulations that apply in the relevant free zone, as applicable, the memorandum of association of a Family Company shall be in conformity with the provisions and terms outlined in the Law.
The Family Constitution, which a Family may insert in its corporate records, has introduced a novel element to the Family Company regime. The Family Constitution shall take precedent over the Memorandum of Association in the case of a controversy. The majority of the members of the Family Assembly, or, in the absence of the Assembly, the majority of the partners of the Family Company, shall approve or change the Family Constitution.
Selling or transferring shares:
If a shareholder wants to transfer his shares to his spouse or first-degree relatives, he must first offer those shares to the other Family Members. Unless the Memorandum of Association specifies a different percentage, no partner may sell his shares to anybody other than a family member without the consent of his partners who control at least three-quarters of the capital.
An heir has the option of selling his or her share, provided that the sale takes into account the aforementioned pre-emptive rights and approval percentages, or remaining as a partner in the Family Company to the extent of the share they inherited.
Redemption
One partner has the right to redeem (buy) the shares of any third-party partners who are not Family Members at the price agreed upon between them or that established by the Committee if he or she controls no less than 90% of the shares of the Family Company. The aforementioned third-party partners will also be able to sell their shares to the 90% majority partner under the same conditions as far as the acquisition price is concerned.
In order to reduce its capital or to redeem some or all of the shares of a partner who wants to sell, the Family Company may also purchase up to 30% of its shares.
Insolvency of the Partner
Any other partner will have the first option to purchase the bankrupt or insolvent partner’s share at the price and within the time frame set by the Court taking the bankruptcy or insolvency into account.
Shares Types
The Family Company could publish:
- Shares of type
(a) have the power to vote and receive profits.
- Shares of type
(b) solely have the right to receive profits.
Depending on the number of votes or profits allotted to each type of share, additional varieties may be created.
Board and Manager of a Family Business
If there are no appointing provisions in the Articles of Association, the partners who own at least 51% of the shares may appoint the Manager of the Family Company by subsequent decision. The Manager of the Family Company shall be appointed in accordance with the provisions of the Articles of Association. Any number of people, including legal entities and members of the partners’ own families, may serve as the Manager.
Read Also: Contractual Disputes Law UAE
Conflict resolution: Council and Committee
A clause in the Memorandum of Association or the Constitution may state that a Council of partners, Family Members, or outsiders will be established to address any conflicts that may develop between the partners themselves, between them and Family Members, or between them and the Family Company. The Council’s members will decide on its authority and procedures for conducting hearings and giving recommendations.
The Law stipulates that a committee known as the Family Companies Disputes Resolution Committee shall be established in each Emirate to handle all disputes if the Memorandum of Association or the Constitution does not provide for the formation of a Council or if the Council fails in its efforts to mediate the dispute within a maximum of three months from the date it was submitted, unless such period is extended during such period by agreement or if it is agreed between the parties.
A judge will serve as the committee’s chairman, assisted by two professionals with expertise in the legal, financial, and family business management domains.
The Family Company Structure:
Unless specifically stated in the Memorandum of Association, the Family Company’s capacity will continue even if one of the partners passes away, is arrested, declares bankruptcy, or becomes insolvent. Accordingly, the partners shall be given a period of 3 months from the date of death, interdiction, bankruptcy, or insolvency, unless this period is extended by the competent authorities, to regularise the status of the company in compliance with the Law and the Commercial Companies Law.
The decision to have the Family Company removed from the Register may be made by the partners who control at least 75 percent of the company’s capital.
Additional rules and restrictions:
According to the Law, the Ministry of Economy is required to issue additional regulations and guidelines regarding the conditions and steps for adding a family company to the Register, sample articles for a memorandum of association, and recommendations on the governance principles for a family company.
A Legacy Buildup:
It is time for family-owned businesses to review and, if necessary, overhaul their ownership structures and governance mechanisms in light of the ongoing innovation and reform in the UAE legal sector and the introduction of this new, bold law. By adopting clear structures, legal frameworks, and mechanisms, they can protect their businesses’ viability and sustainability while advancing their plans for growth, development, and an efficient transition from one generation to the next.
This law allows family business founders the choice between leaving a strong corporate legacy and encouraging cohesion or letting discord fester harm of that legacy. Therefore, without fear of bureaucracy or traditional governance, the founders’ vision will determine how the future potential is handed on to succeeding generations.
