Family Business in the UAE: A Legal Overview

The Family Business Law, or Federal Decree-Law No. 37 of 2022, represents a transformative update to the legal framework governing family-owned enterprises in the United Arab Emirates (UAE). By introducing comprehensive standards, the law aims to ensure the growth, governance, and sustainability of family businesses, which play a critical role in the UAE’s economy. This landmark legislation addresses long-standing challenges faced by family businesses, offering them the legal clarity and tools necessary for resilience in an evolving economic environment.

Key objectives of the Family Business Law:

1. Strengthening Governance Structures: Establishes robust frameworks for transparent and accountable management of family enterprises.
2. Promoting Succession Planning: Provides guidelines for generational transitions, minimizing disputes and ensuring leadership continuity.
3. Encouraging Legal Clarity: Clearly defines the roles, rights, and obligations of family members, business owners, and stakeholders.
4. Enhancing Business Sustainability: Addresses key challenges faced by family enterprises, fortifying their long-term viability

Scope of the Decree-Law

The Decree-Law applies to Family Companies where the majority of the capital is owned by individuals from the same family, provided the company is registered in a unified Register of Family Companies established under the law. This includes most company structures recognized under the Federal Commercial Companies Law, excluding public joint stock companies and general partnerships, as well as businesses established in Free Zones.

Family businesses contribute significantly to the UAE’s economy, particularly in industries such as trade, real estate, and retail. However, they face unique challenges such as generational conflicts, governance issues, and lack of formal succession plans. Federal Decree-Law No. 37 of 2022 directly addresses these issues, aiming to strengthen the economic impact of family businesses and ensure their seamless operation in a competitive landscape.

Notable Features of the Federal Decree-Law

1. Family Constitutions and Governance Bodies

The law allows families to develop tailored Family Constitutions to regulate their internal affairs, governance, and decision-making processes. These documents can outline rules for leadership, shareholder rights, and dispute resolution. Families are also encouraged to establish governance bodies such as:

• Family Assemblies to involve members in strategic discussions.
• Family Councils for strategic decision-making.
• Family Offices for financial and operational management.

2. Innovative Shareholding Options

The Decree-Law introduces flexibility in shareholding structures by:

• Allowing the creation of different classes of shares with varied rights.
• Permitting buy-backs of up to 30% of the company’s shares to facilitate the exit of family members.
• Establishing mechanisms to prevent the transfer of shares outside the family, safeguarding the family’s legacy and control.

3. Dispute Resolution Mechanisms

Recognizing the importance of efficient conflict resolution, the law provides various options, including:

• Arbitration.
• Special Committees established in each Emirate.
• Financial free zone courts.

This flexibility ensures that families can choose the method best suited to their needs, preserving harmony and business continuity.

4. Removal of Shareholder Restrictions

A significant update under the law is the removal of restrictions on the number of shareholders a Family Company can have. This change promotes inclusivity and allows for greater family participation in ownership.

5. Alignment with Personal Status Laws

The Decree-Law explicitly states that its provisions, or those applicable in Free Zones, do not constitute a violation of the UAE Personal Status Law. This addresses a critical aspect of succession planning, offering reassurance that compliance with the Decree-Law will not conflict with inheritance laws.

6. Incentives and Concessions

Family Companies registered under the Decree-Law may benefit from incentives and concessions granted at the discretion of the UAE Cabinet. While the specifics are not yet outlined, these benefits could enhance the competitiveness and operational ease of family businesses.

Additional Considerations

1.      Integration with UAE's Economic Vision

The Family Business Law aligns with the UAE’s broader economic goals, such as diversification and sustainability. By fostering the growth of family enterprises, the law contributes to job creation and innovation, supporting the UAE’s vision to become a global economic hub.

2.      Tax and Regulatory Implications

While the law offers numerous benefits, family businesses must consider its implications on taxation, inheritance laws, and financial reporting. Expert legal and financial advice is recommended to navigate these complexities effectively.

3.      Role of Women in Family Businesses

The decree provides opportunities to enhance the role of women in family enterprises. By formalizing governance and succession processes, it encourages inclusivity and empowers women to take on leadership roles, reflecting the UAE’s commitment to gender equality.

Why the Family Business Law is a Game-Changer

The introduction of Federal Decree-Law No. 37 of 2022 reflects the UAE’s commitment to supporting family businesses, which form the backbone of its economy. The law’s innovative provisions, such as allowing multiple share classes and establishing a Family Business Registry, provide unparalleled flexibility.

Conclusion

While legislative solutions cannot guarantee the success of family businesses, they provide a robust framework for optimizing governance and operational efficiency. Federal Decree-Law No. 37 of 2022 is a is a milestone in the legal framework for family businesses in the UAE. By emphasizing governance, succession planning, and dispute resolution, the law provides a robust foundation for their sustainability and growth. Family businesses must proactively adapt to these new requirements, leveraging the legal clarity and support offered by the decree to thrive in the UAE’s dynamic economic landscape.

By aligning family business practices with global standards while respecting local traditions, the Decree-Law paves the way for family enterprises to thrive in an increasingly competitive world. For family businesses in the UAE, this legislation offers a unique opportunity to secure their legacy and strengthen their contribution to the nation’s economic future.