A New Law on Family Companies in the UAE

A family-owned business maybe be one of 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 businesses which are owned and managed by single families. These businesses play a significant role in the development, growth and diversification of the economy.

More specifically in the United Arab Emirates (UAE), family owned businesses are vital to the economic performance and future growth of the country’s economy given their important contribution to the local gross domestic product (GDP). According to the Ministry of Economy, up to 90% of private companies in the UAE are family businesses involved in a wide array of sectors which contribute approximately 70% of the country’s GDP.

One major challenge for family businesses is to ensure the sustainability and prosperity of such businesses from one generation to the next. According to a number of studies, only 10 to 15% of family businesses make it to the third generation. Family members of the succeeding generation may not have the same level of commitment as the founder of the family business. It has therefore become evident that a comprehensive legislative framework is required to ensure stability in these businesses and the overall economy of the country.

To meet this need, a Federal Decree-Law No. 37 of 2022 on family companies (the “Law”) was issued and published in the Official Gazette. The Law will come into effect in 10 January 2023.

The Law grants to family businesses a more flexible legal framework than the framework of the UAE Federal Decree-Law No 32 of 2021 on commercial companies (the “Commercial Companies Law”). For instance, the Commercial Companies Law (i) does not allow a mainland company to create classes of shares; (ii) provides for statutory pre-emption rights whereby a transferring shareholder is free to dispose of his shares if none of the existing shareholders exercise their right to acquire such shares within a thirty (30) day notice period; (iii) does not provide a suitable mechanism for redemption rights in favour of a shareholder (who owns a substantial portion of the entire issued share capital) to buy out the minority shareholder(s); (iv) is not sufficiently flexible to enable family holding companies to buy back the shares of a family member who wishes to sell his shares in the family business; (v) does not address corporate governance matters in a fashion tailored to family businesses; and (vi) does not provide appropriate mechanisms for dispute settlement for family businesses that do not involve litigation through the courts or arbitration proceedings.

In this context, the Law states the following objectives intended to be achieved by its provisions:

• Establish a comprehensive legislative ecosystem to regulate the ownership and governance of family companies, and its transition from one generation to the next.
• Support the continuity of the family companies and boost the latter’s contribution to the diversification and growth of the economy.
• Provide the appropriate mechanisms for dispute resolution.
• Enhance the family companies’ contribution to the national’s economy and its competitiveness.

It is important to note that UAE mainland family businesses which decide to “opt in” to the regime set out under the Law (as further explained below) are still subject to the provisions of the UAE Companies Law to the extent that the Law does not specifically address a relevant matter.

We set out in this article certain key principles that are introduced under, and key considerations that should be taken into account in relation to, the Law. This article does not purport to be an exhaustive summary of the Law, and we encourage you to get in touch with Meysan Partners team in the UAE for any further information.

 Scope of Law

The Law applies to any 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 single person company and free zone companies.

However, and as noted above, a family business would be required to “opt-in” in order to be entitled to benefit from the legal framework set out under the Law. This would require a majority of the shareholders of the family company to pass a resolution approving the registration of the company as a family company in a special register.

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.

It is important to note that public joint stock companies and joint liability partnerships 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 a single family and registered in the register as a family company under the Law. However, the Law provides that a Cabinet Resolution shall be issued in due course defining what constitutes a “single family”.

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.

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.

The articles 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 charter”, which a family may include in its corporate documents. The “family charter” includes “special rules of the ownership, governance, objectives, and values of the family company, share assessment, distribution of profits, education of the family members and their work therein, the subsidiaries/affiliates thereof, and solution of family disputes and such other rules and provisions agreed upon by the shareholders and family members”.

In the event of a conflict between the articles of association and the family constitution, the former shall take precedence.

Preemption Rights and Buy-Back of Shares

 Under the Law, a shareholder in a family company may now transfer and assign his/her share, with or without consideration, to his/her spouse or first-degree relative, without offering the same to the remaining partners, unless otherwise provided by the articles of association of the family company.

This new concept introduced in the Law will enable certain groups within the family to restructure their shareholding in the family company without being required to first offer such shares to the extended family members.

The Law provides for a buy back mechanism which enables the family company to buy back any outstanding sale shares (but not representing more than thirty 30% of all of the shares of the family company) following an offer made by a family member shareholder wishing to sell his/her shares in accordance with generally pre-emption provisions designed to support the relevant system of pre-emption preferences of the family.

 Right of Redemption

 If one partner in a family company owns shares being no less than 90% of the family company’s shares, he/she shall have the right to redeem (purchase) the shares of the third-party partners who are not family members at the price agreed upon between them, or that determined by the Committee (as further defined below).

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

 Under the UAE Companies Law, only ordinary non-divisible shares are permitted. Other types of equity or “quasi-equity” shares such as preference shares or other types of equity instruments (including different classes of ordinary shares with different rights attaching to them), are not permitted.

However, as part of a succession planning, families often require the ability to benefit from certain control mechanisms pursuant to which certain family members or groups will be able to influence the corporate decision making; such control mechanisms often include granting special voting rights to these family members.

Under the Law, the family company may issue a dual class of shares whereby:

• “A Shares” would have a right to receive dividends and voting rights at the shareholders’ general assembly; and
• “B Shares” would have a right to receive dividends but have no voting rights.

As noted above, this dual share class mechanism which enables the separation of voting rights from ownership rights provides the family with a tool to exercise its control over the management and operation of the family business including mitigating potential risks and issues that arise as a result of an heir becoming a shareholder of the family company.

Furthermore, the Law provides that the articles of association of the family company may include other categories of shares that differ in terms of value, voting power, priority rights and other rights and privileges.

While the default position is one vote per share, the flexibility of the Law permits the creation of several classes of shares with or without voting rights, different voting rights in respect of certain matters including the appointment of the members of the board of directors.

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 provisions appointing the general manager, then he/she may be appointed by a subsequent decision issued by the partners with a majority of at least 51% of the shares, unless the articles of association set out another majority. The manager may be appointed amongst the partners or may be a third party.

The manager, unless otherwise set out in the articles of association of the family company, shall (i) manage the business of the family company, (ii) distribute the dividends in the form adopted by the general assembly, (iii) deduct from the profits any amount due from the partner to the company, and (iv) represent the company towards third parties.

In the event of the death of one of the partners, the manager shall, unless otherwise stipulated in the articles of association, act as the trustee of the deceased partner’s shares. The manager shall also supervise the procedures for transferring ownership of the shares to the heirs and undertake the required procedures for amending the articles of association, after settling any rights or debts that may be related to the shares in favour of the family company or third parties.

The articles of association of the family limited liability company (LLC) may stipulate the establishment of a board of directors to manage the family company. The articles 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/revocation, the appointment of alternatives, the method of adopting decisions, in addition to its affiliated committees and its powers. The articles of association may also include a determination of the appropriate personal and objective criteria for the membership of the board and its affiliated committees.

Inheritance

It is also worth noting that the Law provides that the restructuring by family members of the ownership and transfer of their shares or assets in favour of the family company, whether this is effected through sale, donation or usufruct, shall not be considered in breach of the provisions of the UAE Personal Status Law (Federal Law No. (28) of 2005 on Personal Status), provided that such restructuring is carried out during the lifetime of the transferor transferring such assets and shares.

Under Article 361 of the UAE Personal Status Law, every fraud to the provisions governing inheritance by way of sale, donation, testament or other dispositions shall be considered void.

Therefore, this specific provision of the Law is aimed at negating the potential risk that may arise in the event that a disgruntled heir challenges the validity of an asset transfer to the family company made during the lifetime of the transferor based on Article 361 of the UAE Personal Status Law.

Settlement of disputes – Council, Committee and Arbitration

The articles of association or the “family charter” may include a provision in terms of which a council of partners, family members or third parties shall be formed (the “Council”), to consider the disputes that may arise among the partners themselves, between them and family members, and between them and the family company, and attempt to reconcile between them. The members of the Council shall determine its powers and methods for managing the 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” (the “Committee”) to deal with any and disputes, (i) if the articles of association or the “family charter” does not provide for the establishment of  Council, or (ii) if the Council does not succeed in its amicable resolution of the dispute within a maximum period of 3 months from the submission date of the dispute (unless it is extended during such period by agreement), or (iii) if it is agreed between the parties to the dispute not to refer such 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 be presided by a judge, who will be assisted by two (2) experts 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. Any decision issued by the Committee shall be subject to appeal before the competent court in the UAE.

Any dispute relating to family companies registered in the financial free zones shall be governed by the applicable laws in these free zones.

As an exception to the Committee competence, the parties to the dispute may agree:

• to resort to arbitration pursuant to the laws applicable in the UAE.
• to resort to competent courts in the financial free zones.

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 articles 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 75% of the capital of the family company, they may request the Ministry of Economy to strike off 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 articles of association and guidelines on the governance rules for a family company.

The enactment of the Law gives founders of family businesses across the UAE 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.

To know more about more details, please feel free to contact our UAE partner Zainab Aziz zaziz@meysan.com.

 This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances, or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances, or facts. Access to this article does not form any attorney- client relationship