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UAE: New family business law to come into effect this week; set to drive country's economy

New law will help double family-owned businesses’ contribution to the nation's GDP to $320 billion in 2032 by preparing them for the future economy

The new family business law looks set to strengthen corporate sector and diversyfy the UAE economy by attracting investment in key sectors and contributing more to the country's gross domestic product (GDP) in coming years, experts say.

New law, which becomes effective this week, will follow best international practices and aim at enhancing corporate governance structure in the country. It will help double family-owned businesses’ contribution to the nation's GDP to $320 billion in 2032 by preparing them for the future economy.

Analysts, economists and legal experts said the enactment of the Family Companies Law by the UAE government is a welcome piece of legislation which enables family businesses to overcome challenges when planning succession under the existing legal framework of the UAE Companies Law.

Building business conglomerates

Vijay Valecha, chief investment officer, Century Financial, said the new family business law, which intends to increase the contribution of family enterprises to the national economy and invite additional businesses to establish operations in the UAE, will go into effect in January 2023.

He said family enterprises play a vital part in the UAE economy, accounting for some of the country's largest conglomerates.

“Family firms account for 70 per cent of the worldwide private sector, 60 per cent of the global labour, and 70 per cent of global GDP. In the UAE, family enterprises account for 90 per cent of all private corporations, with investments in real estate, retail commerce, tourism, industrial, technology, shipping, and logistics services,” Valecha told Khaleej Times on Sunday.

Providing legal framework

The new law applies to all family-owned companies that exist in the country, and the owners who own the majority of the shares in the family business who decide to register it in the unified register as a family company in accordance with the provisions of the law, according to the Ministry of Economy.

"Upon its coming to force in January 2023, the new law will provide the legal framework required to ensure the growth of family businesses, help diversify their activities, and facilitate their continuity and longevity through generations," Abdullah bin Ahmed Al Saleh, Undersecretary of the Ministry of Economy, said at a recent media briefing.

Helping family businesses

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, and 50 per cent of the owners of these companies include five shareholders or less, according to an analyst.

“This law would assist family businesses in diversifying their operations, establishing pioneering ventures in modern economic areas, and strengthening their partnerships and opportunities both inside and outside the country,” Valecha said.

“The program seeks to turn 200 family business projects into big corporations with a market value of more than Dh150 billion ($40.84 billion) and yearly revenue of Dh18 billion by 2030 which would go a long way in transforming UAE's growth story,” he added.

Law aims at corporate governance

Farhat Ali Khan, managing partner, Century Maxim International — a legal firm, said the UAE corporate market is set to step into the new year with, yet another reform aimed at enhancing the corporate governance structure and promoting family businesses in the region.

“Aligned with the nation’s sustainable development over the next 50 years, the regulators have established a number of new procedures for administering the family business including setting up a resolution mechanism for the settlement of family disputes,” Khan told Khaleej Times on Sunday.

He said another important component of the new regime is the introduction of a “family charter”. This will help set in place strong guidelines and parameters for transparent and accountable business operations, he said.

“Having key terms and conditions formally recorded can help the business set the tone at the top which is expected to disseminate throughout the business. Such policy management is likely to encourage ethical business practices while complying with the applicable rules and regulations of the land,” he said.

Covering all aspects

Atik Munshi, managing partner, FinExpertiza UAE, said a large part of UAE private businesses are family owned and they are a significant contributor to the country’s GDP as well. The UAE government has announced the Family Company law to address the needs of the family businesses, he said.

"The major aspects which are impacted due to the this law are succession planning, dispute resolution, multiple classes of shares and governance. Though the law has not defined as to which entity can be termed as Family Company, it is likely to follow the international best practises. It will apply to both mainland and free zone registered companies,” Munshi told Khaleej Times.

He said a family charter could now possibly be a way to resolve the above mentioned areas provided it does not conflict with the law. Such family charter would address rules of management, ownership, governance, sharing of profits, voting rights, dispute resolution, valuation, etc, however the charter would in addition to articles of the company.

“It will possible for Family Companies to have voting and non-voting shares whereby ensuring non disturbance in operations and management. Entities who wish to be considered as a Family Company would have to opt in as one, to avail the benefits of UAE Family Company Law,” he said.

“Family company law also talks about redemption rights, management, inheritance etc. among other aspects,” he added.

Referring to a number of studies, experts said only 10 per cent to 15 per cent 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 is therefore important that the legal framework provides sufficient tools and the necessary flexibility for families to ensure that succession is carried out in a smooth and efficient manner to satisfy their objectives,” they said, and adding that this legislation should assist family businesses with succession planning under the existing legal framework of the UAE Companies Law.

— muzaffarrizvi@khaleejtimes.com