UAE's new Family Business Law will smooth succession planning - and speed up dispute resolution when needed
Dubai: UAE family businesses – some of them operational since the 1940s and ‘50s - get all the protection they require in generational change from a new UAE law that will come into effect January. At the same time, the Federal Decree Law No. 37 of 2022 also provides a roadmap for these private enterprises – or parts of it - to consider going public should they choose to.
Legal sources and senior representatives of family enterprises were unanimous in that the UAE law will ‘future-proof’ these businesses to a great extent. And smooth out the succession process as and when needed, and thus avoiding strife that have marred some of the processes in the past.
At the same, there are aspects of the law that will help family businesses take to the future in a more structured way. For instance:
• The law regulates the ownership of family businesses by defining their capital, how the partner disposes of his share, and the mechanism for waiving it, in addition to regulating the right of redemption and evaluation of shares and their categories, as well as the family company's purchase of its shares.
• Cancels the restriction on the maximum number of shareholders in the family company when it is in the form of a limited liability company.
Equally important is the past that allows for the:
• Formation of a committee in each emirate - called the ‘Family Business Dispute Resolution Committee’. These committees are being set up due to the ‘fact that disputes are one of the top reasons that lead to the termination of family businesses,” the statement by the Ministry of Economy said. “Therefore, the formation of the committees contributes to settling family business disputes, and their resolution by specialists (judges or arbitrators), while ensuring speed, confidentiality and efficiency in resolving them.”
Speedy resolution on disputes
The Ministry’s mention of ‘speed’ is telling – this is where the Law could be of help as and when called on by family businesses. If any due legal process is there and which can ensure that such disputes do not drag on will be a positive for all stakeholders. As it would be for the smooth running of all the group’s businesses, because the structure of the UAE’s legacy corporate entities is that they would have interests cutting across multiple sectors.
“The new federal law provides the assurance of continuity and stability of family companies in the UAE,” said Essam Al Tamimi, founder and Chairman at the law firm Al Tamimi & Co.. “And sets out various flexible mechanisms and options for dispute resolution.”
Signing up to family business register
To qualify for the provisions of the new Law, the company must be registered in the newly created ‘Unified Family Business Registry’.
The Law applies to all existing family companies or thereafter incorporated in the UAE, with the exception of public joint stock companies and general partnerships. In this regard, the Law does not create a new form for the family company as family companies will still take the same forms already in place
Direct support from federal, emirate authorities
The Law authorizes the UAE Cabinet to issue decisions regarding the benefits/incentives that will be extended to family companies that are registered on the new register. Such benefits can also be passed on by the authorities at the emirate level.
“The Law does not distinguish among family businesses regardless of their form and place of incorporation, be it onshore or free zone,” said Al Tamimi. “As long as a company comes under the definition of a family company, then it enjoys the unique benefits, incentives, and exclusions available under the Law or such decisions as the Cabinet or the competent authority may issue in implementation of its provisions.”
Process of continuity
According to business sources, the new law is as important as any the UAE has brought in the recent past, which have included 100 per cent ownership benefits to non-UAE National in businesses across sectors, and changes to the Bankruptcy Law. Also seismic in the scope of its change is the de-criminalisation of cheques.
As for family businesses, many of these have significant say in the smooth running of the private sector operations, because of their sheer presence across sectors. In this regard, the same situation exists in other Gulf economies.
The establishment of the Family Business Dispute Settlement Committee will be viewed with interest
Bring in transparency on operations
“This region is unique in that it still remains underpinned by a range of family business and office structures,” said Sachin Kerur, Managing Partner, Middle East at Reed Smith. “The scale and breadth of these businesses means that a landmark and specific legislative framework for them ought to be welcomed.
“Of equal importance is the transparency and governance that the law will impose in order for businesses to diversify, pass through the generations and attract investment including possible future public and institutional ownership.
“The establishment of the Family Business Dispute Settlement Committee will be viewed with interest. The role that dispute resolution plays in family business development is key – a swift, private confidential process conducted by those with significant understanding of the nuances of family business is what will be required together with some in-built conciliatory features.”
First of its kind in region
The UAE Ministry of Economy makes a valid point when it said that such a law has never been attempted before. “This is set to consolidate the country’s position as a foremost and preferred destination for family business investments and projects, regionally and globally,” the statement added.
In the UAE, 90 per cent of private companies are family businesses and operate across industries. Unlike in Saudi Arabia, family businesses are not as well-represented on UAE stock markets, dominated as they are by energy companies, banks and insurers, and property companies.
A number of pioneering initiatives were launched in the last phase to develop the family business sector, most notably the FB-X family business platform and the 'Thabat' program. These are specifically designed to support family business investments, help diversify their activities
The law sets into motion much that can change in the coming years for these businesses – and going public could be one option.
"Family-owned companies in the GCC countries are relatively young, ranging in age between 40 to 60 years, and generate an annual revenue of nearly $100 billion,” said Abdullah Bin Ahmed Al Saleh, Undersecretary at the UAE Ministry of Economy. “And 50 per cent of the owners of these companies include five shareholders or less."
That could all change as the UAE family business law provides the springboard from January 2023…
Preservation of business continuity along with unlocking of value - through exit options in the capital markets and/or through the entry of other strategic partners - is the primary impulse from the UAE Family Business Law. It is an inevitable step for the maturity of the business environment here
Family businesses represent legacy - and the future
- Family-owned businesses contribute 50 per cent of the GDP and 80 per cent of its workforce. They also account for 90 per cent of the companies in the UAE.
- The Top 10 family businesses in the region employ 600,000 people and have a net worth of more than $31 billion.
- 21 UAE families were ranked among the Arab’s world’s 100 most powerful family businesses.
- Around 87 per cent of the region’s family businesses are diversified, while the others specialise in one or two sectors specialise in one or two sectors including real estate, jewellery, FMCG, industrial, food and beverages, and retail.
- Around 38 per cent of businesses are still chaired by the first generation, while 47 per cent are run by the second. A meagre 15 per cent are managed by third-generation or later.
Credit - KPMG