Ensuring success in succession for UAE family businesses
The economic contribution of family-owned businesses in the UAE cannot be understated.
In fact, up to 90% of private companies in the UAE are family businesses, contributing about 70% of the country’s GDP – as per figures cited by the UAE Ministry of Economy. Recent data from KPMG states that the top ten family businesses in the region employ 600,000 people and have a net worth of USD 31 billion (AED 114 billion). It is no wonder then, that providing better support for family businesses has gently climbed up the agenda of the UAE government. This is particularly pertinent in light of recent data revealing that only 10-15% of family businesses in the UAE make it to the third generation.
Longevity of succession planning presents one of the most urgent threats to the survival of family businesses. When the business-owning head of a family passes away and the business is inherited directly by multiple heirs, the ownership of the business can become fragmented, creating the potential for disputes between shareholding family members. If not resolved swiftly, this can cause significant disruption to the operation and growth of the underlying business. When viewed collectively, the potential for such disputes across the many family businesses in the UAE represents a threat not only to the businesses themselves but also to the wider economic prosperity and growth of the region.
Succession in practice
A case in point is the dispute which arose between the ten heirs of the late Majid Al Futtaim, the founder of one of Dubai’s largest private companies. The group has $16bn of assets worldwide and the retail and leisure empire operates 29 malls, including Dubai’s Mall of the Emirates. Amidst reports of discord among the founder’s heirs, and in light of the importance of this family-owned retail and leisure empire to Dubai’s economy, Dubai’s ruler Sheikh Mohammed bin Rashid Al Maktoum appointed a judicial committee to mediate among the shareholders and protect both the interests of the company and Dubai’s economy during the transition of ownership following the founder’s death.
At a federal level, the UAE has until recently done little to regulate family businesses as distinct from other business structures. In particular, the federal legal infrastructure has historically made no provision allowing family businesses to be held within succession planning structures equivalent to the trusts, foundations and other structures that in other jurisdictions have been used to mitigate these same succession risks for hundreds of years.
A new regulatory landscape
It is against this backdrop that the UAE government has introduced the Federal Decree-Law No. 37 of 2022 Concerning Family Businesses (or ‘FDL37/22’). The new law applies with effect from 31 January 2023.
The stated objectives of this new law are (among others) to set an inclusive and easy legal framework to regulate ownership and governance of family businesses, to facilitate their transfer between generations, to support continuity of family businesses, to provide proper mechanisms for resolving disputes related to family businesses, and to enhance the contribution of family businesses to the UAE’s economy and its competitiveness.
The new law applies in all Emirates and free zones of the UAE, including the Dubai International Financial Centre and Abu Dhabi Global Market, subject to any relevant local company laws. The law applies to ‘family businesses’, being entities which are incorporated in accordance with the relevant companies’ law (but not as a public joint stock company or general partnership), majority owned by members of a single family, and registered in the newly established unified register of family businesses. A family business can have any number of partners.
What do family businesses need to know?
In a departure from existing rules not allowing a UAE company to create different classes of shares, the new law enables family businesses to create multiple classes of share, with the rights and privileges attaching to each to be determined by the business through its Memorandum of Association. All such classes entitle the holder to receive profits, but not all share classes need entitle the holder to voting rights. This ability to confer a form of ownership without voting rights may provide families with a useful means of granting ownership of their business to a greater number of family members while reserving control over the management and operation of the business only to those family members equipped and incentivised to oversee its continued success in the ownership of the family.
Prior to the new law statutory pre-emption rules did not allow a shareholder to transfer shares without allowing all existing shareholders an opportunity to acquire the shares. Subject to this, the shareholder was free to transfer the shares to anyone. The new law creates an exception, subject to the company’s Memorandum of Association, whereby shareholders can sell or transfer shares to a spouse or first-degree relative independently of these pre-emption rights. This should provide greater freedom to certain groups within families to restructure their shareholdings without the risk of losing their shareholdings altogether. The new law also gives family businesses greater powers to tailor the governing articles to support the pre-emption preferences of the family as a whole, including a mechanism for the business to buy back shares following an offer by a family member or otherwise for the purpose of reducing its capital up to a maximum cap of 30% of its shares.
In other provisions, the new rules seek to provide a flexible framework for corporate governance of family businesses, whereby the default provisions dealing with the entity’s governance and committees apply subject to the amendment and tailoring of such provisions in the Memorandum of Association of the particular business.
The new law also allows family members to agree and enter into a Family Constitution to support family and business governance. The legislation provides for flexibility in terms of the individuals who will run and manage the business and enables bespoke provisions to be made as there is never a “one size fits all”. In particular, the family members can establish different governance bodies for their future use, to include bodies such as a family office, a family council and other committees.
Lastly, whereas the previously applicable rules did not provide any mechanisms for resolving family disputes other than litigation in the courts or arbitration proceedings, the new law empowers families to consider alternative means of resolving disputes in the first instance, including reconciliation through a committee of family members formed for this purpose in accordance with the articles of the company and which the new law empowers to take such preventive and urgent measures as it deems proper to protect the business while it works to resolve the dispute.
The DIFC & family businesses
On a local level, the DIFC has set up the Global Family Business and Private Wealth Centre and has implemented local legislation in the form of the Family Arrangements Regulations 2023. These regulations, effective as of 31 January 2023, provide a structure for the Centre’s initiatives and build on the changes brought in by the new law to further enhance the legal framework within which DIFC family businesses operate. This local initiative empowers families to achieve better operation of their businesses, ensuring that succession and legacy planning, and the preservation of wealth, are core considerations when it comes to forward-planning and strategy.
It remains to be seen if the new law and the new DIFC Family Arrangements Regulations 2023 will provide the certainty and security family businesses need to survive beyond the third generation. In principle, the new laws should provide family businesses a framework within which they are empowered to structure the management of their assets and entities in a way that is bespoke to the nuances of the family, and the business in question, and to the nature of challenges faced by family businesses compared to other business structures in the UAE. The new law supports the DIFC’s 2030 plan, which will allow the DIFC to double both its size and economic contribution to Dubai’s GDP by 2030 and appropriately acknowledges the role family businesses have to play in fostering sustainable economic growth for the region.
This article was first published by The Oath in June 2023.