Large family-owned businesses are the backbone of GCC’s private sector economy. This is particularly true about the UAE.
In this context, the new law issued by Government of Abu Dhabi is extremely relevant in protecting the current and future ownership and the preservation of the structural integrity of this important segment of the economy.
Clearly, the Government of Abu Dhabi has recognised the importance of protecting these organisations in generational transition of wealth within these families while not losing the control outside the families that could prove detrimental to the very existence of these business organisations.
The new law, in essence, empowers owners of family business to prevent selling of shares or dividends to individuals or companies outside the family, and to require prior approval from family partners before a shareholder sells her/his respective equity stake to a non-family member.
Robust legal framework
In the absence of an appropriate legal framework governing generational transition of family wealth, succession and transfer of shares outside the family can lead to break up and fragmentation of large family-owned conglomerates that are significant stakeholders in the national economy. While such events can lead to strategic private assets falling into the hands of external owners, these businesses could even become subject of hostile acquisition bids.
The new law clearly gives an edge to the existing family businesses in Abu Dhabi to protect their long-term sustainability while giving them an opportunity to ring-fence family-owned enterprises through a robust legal framework.
Among its various provisions, the law gives family businesses to opt for issuing family-owned shares with weighted voting rights and prevent the pledging of family-owned businesses as encumbered assets, to avoid expropriation.
While the new law seeks to protect the sustainability of family businesses in the emirate, it also is equally mindful of the shareholder rights of minority shareholders.
In keeping with the international best practices in corporate governance, the new law specifies that its provisions are not applicable to family-owned businesses where non-family members own more than 40 per cent of shares.
Currently, the capital structure of family businesses in Abu Dhabi allows non-family members to own up to 40 per cent of equity. While such external capital ownership is important in raising cheap funding, it also comes with the caveat that beyond the permitted threshold the family ownership of the business might come under threat.
The executive and administrative regulations of the new law that will come into effect in March 2022 will add a new dimension in the preservation of family-controlled businesses in the emirate while providing protection to minority shareholder rights.