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New UAE family business law explained: How it helps resolve disputes, distribute shares

Rule comes as part of government efforts to support family businesses, in recognition of their importance in driving the economic transformation of the Emirates

A new law on family businesses will come into force in January 2023. Essam Al Tamimi, a legal expert and Essam Al Tamim, Founder and Chairman, Al Tamimi & Company says the law provides the necessary flexibility for families to manage their own affairs and organise the administration of their business.

“To this end, the law regulates several key matters and provides the assurance of continuity and stability of family companies in the UAE,” he told Khaleej Times.

Abdullah Bin Ahmed Al Saleh, Undersecretary of the Ministry of Economy, said during a media briefing on Monday that the Federal Decree Law No. 37 of 2022 on family businesses was introduced by the UAE government to enhance and raise the family business environment in the country to globally competitive levels.

The law comes as part of government efforts to support family businesses, in recognition of their importance in driving the economic transformation of the UAE through the contributions that large family businesses make to boosting GDP growth and international trade.

What is a family company?

Al Tamim has explained that the law defines a family company as a company incorporated under the Companies Law whose majority of shares are owned by persons belonging to the same family and is registered in a special register of family companies at the Ministry of Economy.

“Under the law, a company loses its family company status if the partners from among family members cease to be majority shareholders, and with that the company loses its benefits under the law,” he said.

“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 in the UAE under the Commercial Companies Law or in the free zones as per their own legislations.”

According to the expert, notwithstanding that the law confirms that family companies are subject to the Companies Law, it provides that this will only apply where there is no special provision in the law.

“Where a special provision exists, such provision shall apply and not the provisions of the Companies Law,” Al Tamim explains.

“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.”

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The law gives family companies the right to adopt a charter that regulates the governance of family affairs relating to the family company.

The law further allows a family charter to include conditions, standards, and qualifications to be met for family members to be considered for employment with the family company.

The law also provided for other mechanisms to regulate family governance and the family’s relationship in relation to the company through the creation of various bodies such as the family assembly, the family council, and the family office, each of which is responsible for specific tasks.

Law does not set maximum limit on number of partners in family company

Unlike the Commercial Companies Law, the new law does not set a maximum limit on the number of partners in a family company and gives family members the right to agree, in the memorandum of association and charter, on equal or different rights for the partners with respect to dividends, management, and other rights and benefits.

A key provision of the Law permits different classes of shares. For example, shares in the company may be divided into class (a) shares and class (b) shares, according to the partners’ wishes, such that class (a) shares give its holders dividend and voting rights while holders of class (b) shares have a right to receive dividends but not to vote. This, of course, does not detract from the partners’ rights to regulate profit distribution and allocation, as mentioned above.

In order to protect the family enterprise and to ensure that the shares in the family company remain within the family, the Law provides strict controls and procedures on the disposal of shares to non-family members, whereby the partners from among family members are given a preemption right in addition to a right of redemption in certain cases.

Among the additional positive features of the law is the right of a family company to purchase its own shares. Such right was previously restricted to joint stock companies and in exceptional cases only. Under the Law, families now have additional means to protect family companies and preserve continuity of ownership while family members have the flexibility to exit the company.

Al Tamimi explains that in a unique development aimed at duly organizing the affairs of families and the family company in terms of ownership and management the law requires a partner holding at least 90 percent of the shares of a family company to give notice to the partners who are non-family members of his intention to purchase their shares, at the price agreed between them or, in the event of disagreement, as determined by the dispute resolution committee. Where the other partners are family members, the Law requires a partner holding at least 95% of the shares of a family company to give notice to the other partners of his intention to purchase their shares at the price agreed between them or, in the event of disagreement, as determined by the dispute resolution committee

Law sets out flexible mechanisms and options for resolving disputes

In practice, the dispute resolution mechanism related to family companies is perhaps one of the biggest challenges families and family businesses face. In view of this, the law sets out, at Article 19, various flexible mechanisms and options for resolving disputes that arise between family members and partners, and between them and the family company. The law allows for a conciliation process to be agreed upon, in the memorandum of association or charter, through a board made up of individuals, partners or third parties, for the resolution of disputes.

In the event that the parties do not agree on a means of conflict resolution or if the board fails, through conciliation, to reach a solution within three months or during any additional period agreed upon by the parties or if the dispute is not referred to the board, the dispute shall be decided by the dispute resolution committee, within a period of three months. This period may be extended upon a reasoned request from the parties concerned.

The law provides for a dispute resolution committee to be established in each emirate by a decision of the Minister of Justice or the head of the local judicial authority, as applicable.