The UAE government, on October 3rd, 2022, issued Federal Decree-Law No. 37, which is a comprehensive legislation regulating family businesses in the UAE. The law is introduced with the aim of boosting the contribution of family businesses to the economy of the country, as laid down in Article 2, along with maintaining their continuity and establishing an appropriate mechanism for dispute resolution.
The law will come into force from January 3rd, 2023. Some key takeaways from the law are discussed below.
Family Business: Defined under Article 1 of the new law, a family business refers to a company that is incorporated under the Companies Law, wherein most of the shares and stocks are owned by members belonging to one family.
Applicability: Article 3 determines the scope of application of the new law.
Any family business that is existing in UAE at the time of enforcement of the new law will be governed by it. Family businesses coming into existence once the law is enforced will also be subject to its provisions. Owners of the majority of the shares of the business shall register their business in the Family Business Register, which enlists the family businesses existing in accordance with the provisions of the new law.
Family businesses in the different emirates may apply this law if local legislation in this regard is absent, or to the extent that it does not conflict with the corresponding law of the concerned emirate.
Family businesses existing in the Free Zones will apply this law as long as it is not in conflict with the corresponding laws of the Free Zones.
However, is not applied to public joint stock companies and general partnerships.
Memorandum of Association: A MOA for a family business may be framed in accordance with the provisions of the new law as well as Federal Decree-Law No. 32 of 2021, on Commercial Companies. Family businesses operating in the Free Zones shall apply the relevant Free Zone legislations.
Family Charter: In addition to a MOA and an AOA, a family business may constitute a Family Charter under Article 6 of the law. A family business charter contains fundamentals of the business, like:
- Rules concerning ownership
- Objectives of the business
- Family values
- Procedure for evaluating shares and distributing profits
- Educational qualifications required by family members to join the business
- Dispute resolution mechanisms
Approval and amendment of the charter is the responsibility of the family council, and if such council does not exist, the majority of the partners who are family members will carry out this role.
Number of Shareholders: No limit to the number of shareholders in a family business as mentioned under Article 7(1) of the new law. However, pursuant to Article 11, a family business cannot buy more than 30% of all the shares of the company.
Classification of Shares: A family business can issue dual classes of shares as stated under Article 12, them being:
- Class (A) shares, having the right to vote at the shareholder general assembly, and to receive dividends
- Class (B) shares, having only the right to receive dividends
This division of shares allows separation of voting rights from those of ownership, thus protecting the business and its management.
Disposal of Shares: If a partner in a family business wants to dispose of their shares, they may offer them to the other partners, or waive them to their spouse or relatives up to the first degree.
Management: Articles 14-18 govern the management of the family business.
Article 14 stipulates that the MOA for the family business will provide for a manager, who will be responsible for managing the affairs of the company. He can be appointed by the partners owning 51% of the shares. Article 14 also provides for a board of directors for the company, in case the company is a limited liability company.
The duties and obligations of a manager are enlisted in Articles 15 and 16 respectively.
Committees and councils may be established to carry out tasks related to their fields, for example the Family Council, or the Family Committee.
Dispute Resolution: Conflicts may arise in a family business, either due to the business or interpersonal relationships. To resolve disputes and ensure smooth functioning of the business, the law mandates the formation of a board, under Article 19(1), by the partners, consisting either of family members or non-members. The function of this board will be to resolve any issues arising between partners or family members. The law also provides for the establishment of a Family Business Dispute Resolution Committee in each Emirate (Article 20). Any dispute which the board fails to reconcile will be decided upon by the Committee within 3 months. Parties to a dispute in a family business also have an alternate option to settle the matter through arbitration as per the UAE law, or through the courts of the financial Free Zones of the UAE.
Cessation as Family Business: A family business will lose its nature as well as its name in the family business register if the majority of the business shares and voting rights are owned by members not belonging to the family.
Benefits and Incentives: As per Cabinet decision, family businesses will also be provided with appropriate benefits and incentives to enhance their performance further.
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