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05 February 2016

Family offices in the Middle East

What are the main legal risks facing family businesses in the Middle East? Is there a change in the mind-set with regard to implementing modern business practices?

At the macro level the Organisation for Economic Co-operation and Development is increasingly tightening their transparency initiatives at a time when globalisation is increasing competitive pressures.

In addition, geopolitical tensions are rising globally. The adoption of best practice codes of corporate governance assists with transparency and better outcomes.

At the family business level succession planning will be a key consideration for families to ensure a smooth transition to the next generation and ensure longevity. The mind-set in relation to corporate governance is changing as evidenced by the increasing popularity of Family Charters and Family Council governance mechanisms.

How important is it for family businesses to embrace a trust structure?

The most robust succession and wealth protection vehicle is the English law trust. However, it should be noted that other succession planning vehicles could also be considered and compared with the trust, for example:

  • a foundation
  • a family investment company, with different classes of shares and share rights, or
  • a limited partnership, where the patriarch can retain voting control whilst passing on some of the economics to the next generation. 

Comparing and contrasting the different vehicle options will ensure an informed choice is made before any single succession vehicle is adopted.

What can a family business do to ensure stability? Is there a one-size-fits-all approach?

Given all families are different and have their own likes and dislikes there is no one-size-fits-all approach. However, the family owners should consider:

  • adopting best practice in terms of corporate governance standards, and
  • a Family Charter which will clearly set-out the rules of the family members, including their interaction with the business executives (for example, by confirming who the family business board should report to in the event of the death of the patriarch).

The setting-up of a family office (“FO”) can assist can also assist in investing and diversifying the family’s wealth, thereby reducing the risk of having all the families wealth in a single business and region.

This a key reason why international families are increasingly setting-up up FOs in London, in particular given London’s expertise in global investment management.

A top tip for the general counsel of a family business who may be considering the restructuring option.

The key issue to consider is whether the current holding structure:

  • is robust in terms of transparency, substance and good governance, and
  • has full access to bilateral investment and tax treaties.

The UK, UAE and Luxembourg are key holding jurisdictions to consider in meeting these key objectives. A combination of both holding jurisdictions could also be attractive in certain circumstances.

We recently acted for an Egyptian family business in their holding company restructuring where the key drivers were transparency whilst retaining confidentiality (for individual family members/owners).

A UK operating holding company was ultimately adopted to hold the Middle Eastern based global manufacturing business.

Do you think the slide in oil prices will have a negative effect on private wealth?

In the short term, the fall in oil revenues will inevitably impact some businesses more than others. For example, oil service companies will be impacted more than airline businesses.

However, should the oil price stay down for an extended period then more sectors of the regional economy will be negatively impacted.

To some extent we as a firm are already seeing a flight to safety to London prime residential property.

Private wealth in the MEA region is projected to reach approximately USD7.2trillion by 2018. Is the Middle East well-positioned with laws and regulations to tap this opportunity?

Yes. Both the geographical positioning of the Middle East between the cross-roads of Europe and Africa on the one hand and Europe and Asia on the other gives the region a unique time zone and location advantage in terms of effecting business between the key African and Asian growth regions and the West.

In particular, the UAE’s signing of a number of comprehensive tax treaties and bilateral investment treaties with a number of African and other countries further enhances the regional attraction of basing a holding company in the UAE for the purpose of inbound investment into the region and beyond.

In particular, the use of a UK (family) holding company with a UAE sub-holding company should, in certain circumstances, be considered.

This article was written by Ashley King-Christopher.

For more information, please contact Ashley on +44 (0)20 7427 6630 or