The Government of Dubai issued Law No. 9 of 2020 Regulating Family-Owned Businesses in Dubai, on 13 August 2020 (the Law).
The Law is an important step forward to fill a gap in the governance of family businesses, and this note will look at why the Law is needed, what it does and its potential impact.
Background to the Law
Much of the UAE market is controlled by family businesses, and anyone doing business in Dubai will be familiar with the family names that have become powerhouses across various industries such as real estate, hospitality, construction, automotive and retail. Even looking beyond the large conglomerates, a substantial portion of SMEs in the country are family-owned businesses.
Historically, there has been no practicable legal framework that is specifically tailored to family-owned businesses. As a result, fractured and informal arrangements are frequently put in place to address the rights and obligations in these types of businesses, resulting in disorganised and incoherent structures. This can give rise to uncertainty and disputes over ownership, rights to income, management and succession. When these disputes spill over into the business, which they often do with family-owned businesses, it can interrupt daily operations, derail growth plans and deter third party investors.
The Law aims to provide a governance framework that is appropriate for family-owned property and businesses. It marks an important development that could help family businesses tidy up their internal structures to protect their businesses and the family's stakeholders.
What the Law does
The Law recognises and legitimises the concept of a contract entered into between family members up to the fourth generation to govern the collective ownership, management and administration of family-owned wealth (the Family Property Contract and a party thereto will be referred to as a Partner). Families have previously sought to enter into private contracts or memoranda regarding family wealth and succession, yet the validity and enforceability of these arrangements have been questionable. The Law now provides a framework to ensure validity and enforceability of these types of arrangements.
The Family Property Contract can be entered into for all kinds of movable and immovable property, with the exception of shares in public joint stock companies. Provided that the Family Property Contract meets the six conditions set out in Article 6 of the law, which include notarising it before a notary public, the Family Property Contract will be valid.
The Law sets out the parameters for how to deal with matters such as management, disposal, succession and disputes in relation to the family property, which are briefly described below.
A manager should be appointed to manage the family property, and a Board of Directors may also be formed to oversee the family property and its management. The Law provides a degree of flexibility to tailor the management structure in the Family Property Contract.
The Law clarifies the status of heirs to Partners to the Family Property Contract. It confirms an heir's right to adhere to the Family Property Contract, and their rights and obligations in relation to the family property.
The problem of third party claims to family property has been a key factor for many family businesses, and the Law includes protections against division or disposal of the family wealth that run contrary to the terms agreed by the Partners to the Family Property Contract. For instance, a Partner is not permitted to divide the family property while the Family Property Contract is valid.
In addition, disposals to any third party are subject to a right of first refusal held by the other Partners, and the consent of Partners owning at least 51% of the family property is also required.
The Law provides a mechanism for dealing with a Partner who becomes bankrupt or insolvent, and gives priority to the remaining Partners by permitting them to acquire the bankrupt or insolvent Partner's share in the family property.
Importantly, disputes are referred to a committee that is formed by decision of His Highness the Ruler of Dubai specifically to settle disputes arising from Family Property Contracts.
There is a practical implication of the Law that should be kept in mind with respect to potential disputes, and that is that the Law only requires a 51% majority to terminate the Family Property Contract or to approve of the disposal of property to a third party. The Law does not state that Partners are free to set a higher threshold in the Family Property Contract, which means that critical decisions in relation to the family property can be effected even with a major split within the family (i.e. even if Partners owning 49% of the family property object to the termination or disposal to a third party).
The objective of the Law is to facilitate the smooth transition of family wealth between successive generations and ensure the continuity of family businesses. The question of succession and business continuity is an area of great concern for family-run businesses and anyone dealing with them, including commercial counterparties, employees and potential investors. The Law provides a framework for how to deal with this in a manner that promotes transparency between family members, and stability for the family business.
Further action will be required, however, and the Law calls for government agencies in Dubai to take measures necessary to effect the Law, including setting up commercial and real estate records with respect to family property. Establishing these records will be critical in eliminating uncertainty and disputes over family property, and the efficacy of the Law will, to a large extent, depend on the actions of Dubai's government agencies in this respect.
We will continue to monitor developments with regard to the Law and provide updates accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.