UAE Family Businesses Law
In an article for LexisNexis Middle East, Piers Master, Partner, William Reichert, Partner and Charlotte Jackson, Associate analyse the much-anticipated Federal Decree-Law No. 37/2022 on Family Businesses issued on 10 October 2022, which will come into effect three months after its publication in the Official Gazette.
Federal Decree-Law No. 37/2022 seeks to continue the UAE’s efforts to support the sustainability, growth and development of family businesses and add regulation to ensure their societal contribution can continue.
It is the first Federal law to provide regulation of family businesses, and as such provides family businesses in the UAE with a way to structure and plan their wealth management, while providing a long-awaited opportunity to hold family business within succession planning structures.
Importantly, Federal Decree-Law No. 37/2022 applies in all freezones, including the Dubai International Financial Centre and Abu Dhabi Global Market, but remains subject to the relevant companies’ laws in force therein (to the extent that such matters are not set out in Federal Decree-Law No. 37/2022). This is of key importance given that Federal Decree-Law No. 37/2022 expressly confirms that the transfer and ownership of shares under Federal Decree-Law No. 37/2022 will not be in violation of Federal Law No. 28/2005 on Personal Status, giving families the opportunity to arrange their assets outside of the rules and restrictions of Federal Law No. 28/2005.
To qualify as a “family business” an entity can be owned by any number of partners, but must be:
- incorporated in accordance with the relevant companies’ law, but not as a public joint stock company or general partnership);
- the majority of the shares in such entity must, at all times, be owned by persons belonging to a single family; and
- such entity must be registered in the unified register of family businesses (such register to be established by Federal Decree-Law No. 37/2022).
Article 12 of Federal Decree-Law No. 37/2022 provides family businesses the right to issue different classes of shares, including
- voting and profit bearing shares, and
- non-voting, profit bearing shares and other shares that differ in value, voting power, profits and priority.
The entity’s articles of association can determine the rights attaching to the different classes of shares and any conditions of transferring voting shares to non-voting shares and vice versa (subject to further regulations to be issued in due course).
Federal Decree-Law No. 37/2022 contains a statutory pre-emption right on transfer, save where the transfer is to such family member’s spouse or first-degree relatives. Any transfer to a third party must be approved by person representing at least 75% of the share capital.
At such time that a single family member holds 90% or more of the shares, the remaining shareholders will have the right to sell their shares to them at a price agreed between them or determined by a Committee established in accordance with Article 9 (2) of Federal Decree-Law No. 37/2022.
Article 11 of Federal Decree-Law No. 37/2022 now specifically allows for buy-back of shares by the company, up to a maximum cap of 30% of its shares, for the purpose of
- reducing its capital, or
- the purchase or redemption of a shareholder’s shares in the event that such shareholder desires to sell, or in the event of their bankruptcy/insolvency (but where there are no buyers for such shares).
Family businesses are given the flexibility to manage their affairs within the business, including giving directors the right to distribute profit, and deciding how to organise the entity’s governance and committees. The family can also choose how to deal with the settlement of disputes, such as reconciliation through a committee formed by the family.
Whilst this has not yet been tested, Federal Decree-Law No. 37/2022 has afforded family businesses a framework within which they can structure the management of their assets and entities, whilst remaining true to the nature of family businesses and their nuances compared to other business structures.
This article was first published by LexisNexis Middle East in November 2022. To download a copy of the full article, please click here: LexisNexis Middle East - UAE Family Businesses Law.