A family-owned business maybe be the oldest form of business organization in human history. In the GCC, the business environment has developed exponentially to the extent that there are large corporate enterprises which are owned by single families. Such businesses play a significant role in the development, growth and diversification of the economy.
It has become evident that a comprehensive and modern approach to succession planning is required in the UAE to ensure stability in these businesses and the overall economy of the country.
To meet this need Federal Decree-Law No. (37) of 2022 on Family Companies (“the Law”) has been enacted to ensure the growth and sustainability of family owned-businesses in line with best international practices with the following stated objectives:
a. Establish a comprehensive legislative ecosystem to regulate the ownership and governance of Family Companies.
b. Ensure a smooth transition from one generation to the next creating a legacy of resilience.
c. Adopt a more flexible and sustainable economic model in line with best international governance practices.
d. Support the continuity of the Family Companies and boost the latter’s contribution to the diversification and growth of the economy.
e. Alleviate the risks of management and ownership fragmentation.
f. Provide the appropriate mechanisms for dispute resolution related to Family Companies.
g. Enhance the Family Companies’ contribution to the national's economy and its competitiveness.
Scope of Law
The Law applies to existing Family Companies as well as those registered after the enactment of the Law.
A Family Company can take the form of any company recognized by the Commercial Companies Law, including the One Person Company LLC, and free zone companies.
The Law is applicable in all Emirates of the UAE, unless there is local legislation regulating these companies in an Emirate. In this case, the application of the Law is limited to the areas that are not regulated or stipulated by the local Emirate’s laws.
Public Joint-Stock Companies (PJSCs) and General Partnership Companies are excluded from the scope of the Law.
What is a Family Company
The Family Company is every company established in accordance with the provisions of the Commercial Companies Law, in which the majority of its capital or shares is owned by persons belonging to the same Family and registered in the Register as a Family Company under the Law.
Importantly, the Family Company is not considered a new form to be added to the forms of the commercial companies mentioned in the Commercial Companies Law.
A Family Company may be owned by any number of partners (shareholders).
The Family Company capacity shall cease to exist if persons outside the family own a majority of its voting shares.
Subject to the legislation in force in the free zones, Family Companies shall be subject to the provisions of the Commercial Companies Law and other legislation in force, in all the matters where a particular text has not been provided in the Law.
Family Company Register, Articles of Association and Constitution
Family Companies shall be registered in the Register established for this purpose with the UAE Federal Ministry of Economy in coordination with the competent authority (of the individual Emirates), which may have a special Register to register Family Companies.
The memorandum of association of a Family Company shall be in accordance with the provisions and terms stipulated in the Law, in addition to the provisions stipulated in the Commercial Companies Law or the laws applicable in the relevant free zone, as the case may be.
An innovative part of the Family Company regime has been introduced through the Family Constitution which a Family may include in its corporate documents. The Family Constitution can set out the rules of the ownership, objectives and values of the Family, mechanisms for valuing the shares, the profit distribution model, education, and qualifying criteria for the family’s members to work in the Family Company and its subsidiaries and settling any Family disputes related to the Family Company, and other rules and provisions.
In the event of a conflict between the Memorandum of Association and the Family Constitution, the former shall take precedence.
The Family Constitution shall be approved or amended by the majority of the Family Assembly's members, if the Assembly does not exist, then it shall be by the majority of the Family Company’s partners.
Sale or disposal of shares
If a shareholder wishes to sell his shares, he needs to first offer such shares to the other Family Members, except if the transfer is to his spouse or first degree relatives. No partner may dispose of his shares to a third party other than a Family member, except with the approval of his partners who own at least three quarters of the capital, unless the Memorandum of Association stipulate another percentage.
An heir has the right to remain in the Family Company as a partner to the extent of his inherited share or to dispose of his share, provided that this disposition considers the aforementioned pre-emptive rights and approval percentages.
Such provisions safeguards the business from potentially hostile situations or unpredictable deals which could negatively impact the operations of the business and the family shareholders within the company.
Right of Redemption
If one partner owns shares being no less than 90% of the Family Company's shares, he shall have the right to redeem (purchase) the shares of the third-party partner/s who are not Family Members at the price agreed upon between them, or that determined by the Committee. The said third-party partners likewise will have a right to sell their shares to the 90% majority partner on the same terms regarding the purchase price.
The Family Company may also purchase no more than 30% of its shares to achieve a reduction of its capital or to redeem some or all the shares of a partner wishing to sell.
Bankruptcy of Partner
In the event of the bankruptcy or insolvency of one of the partners any other partner shall have the pre-emptive right to purchase of the partner's share at the price and within the period determined by the Court considering the bankruptcy or insolvency.
Types of Shares
The Family Company may issue:
a. type (a) shares - right to receive profits and vote.
b. type (b) shares - right to receive profits only.
Each type of share may be further divided into types according to the number of votes or profits allocated to them.
Family Company Manager and Board
The Manager of the Family Company shall be appointed according to the provisions of the Articles of Association or if there are no appointing provisions then he may be appointed by a subsequent decision issued by the partners who own at least 51% of the shares. Such Manager may be one or more persons, whether from the partners themselves or from third parties, and may also be a legal person. Provided that if there is more than one Manager, at least one of them must be a natural person.
In the event of the death of one of the partners, the Manager shall, unless otherwise stipulated in the Memorandum of Association, act as the trustee of the deceased partner's shares. He shall also supervise the procedures for transferring ownership of the shares to the deceased’s heirs and take the required procedures for amending the Memorandum of Association, after settling any rights or debts that may be related to the shares in favour of the Family Company or third parties.
In a limited liability company (LLC) the Memorandum of Association of the family limited liability company may stipulate the establishment of a board of directors to manage the Family Company. The Memorandum of Association can also include the rules, controls and conditions governing the establishment of the board of directors, its powers, the term of membership, the remuneration of its members, their dismissal, the appointment of alternatives, the method of making its decisions, in addition to its affiliated committees and its powers. The Memorandum of Association may also include a determination of the appropriate personal and objective criteria for the membership of the board and its affiliated committees.
Settlement of disputes – Council and Committee
The Memorandum of Association or the Constitution may include a provision in terms of which a Council of partners, Family Members or third parties shall be formed, to consider the disputes that may arise among the partners themselves, between them and Family Members, and between them and the Family Company. The members of the Council shall determine its powers and methods for managing its hearings and issuing its recommendations.
The Law provides that a Committee shall be set up in each Emirate, called the Family Companies Disputes Resolution Committee to deal with all disputes if the Memorandum of Association or the Constitution does not provide for the formation of a Council, or if the Council does not succeed in its conciliation efforts within a maximum period of 3 months from the submission date of the dispute, unless it is extended during such period by agreement, or if it is agreed between the parties to the dispute not to refer their disputes to the Council. The Committee shall be headed by a judge with the assistance of two experts experienced and competent in the legal, financial and family business management fields.
The Committee shall decide on the grievance within a maximum period of 3 months, which may be extended for a similar period at the reasoned request by the concerned parties. This Committee may take the necessary preventive and urgent measures it deems appropriate to maintain the continuity of the Family Company, and to prevent the interruption of its business or affect its reputation or financial position throughout the consideration period of the dispute.
Invalidity of Family Company Structure
The Family Company capacity shall not cease with the death, interdiction, bankruptcy or insolvency of one of the partners, unless otherwise agreed in the Memorandum of Association. Accordingly, the partners shall be granted a period of 3 months from the date of death, interdiction, bankruptcy or insolvency, to regularize the status of the company in accordance with the Law and the Commercial Companies Law, unless this period is extended by the competent authority.
At the decision of the partners who own at least three quarters of the capital of the Family Company, they may request the Ministry to remove the Family Company from the Register.
Further regulations and guidelines
The Law provides that further regulations and guidelines are to be issued by the Ministry of Economy, specifically related to the requirements and procedures for registering the Family Company in the Register, model articles for the Memorandum of Association and guidelines on the governance rules for a Family Company.
A Legacy of Resilience
Considering the continuous innovation and reform in the UAE legal space and post introduction of this new bold law, it is high time for family-owned businesses to examine and overhaul, if need be, their ownership structures and governance apparatus by adopting clear structures, legal framework, and mechanisms to safeguard their business viability and sustainability while boosting their plans for expansion, development, and effective transition from one generation to the next.
This law gives founders of family businesses across the region the option to pass on a solid business legacy and inspire cohesion instead of allowing conflict to fester to the detriment of that legacy. Thus, it will be the vision of the founders that will dictate the future potential passed on for generations to come without fearing bureaucracy or old-fashioned governance.
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