The UAE is a country where a large part of its economic fabric was shaped by family-owned businesses and enterprises. Large family-owned businesses – owned by both local as well as expat families, have existed in the UAE since the country’s inception. However, like any other business, a family-owned business also comes with its own challenges, and one of the biggest challenges lies in establishing a seamless structure and managing the smooth operation of such businesses.
In line with the UAE’s commitment to constantly improving the business and operational rules and regulations, the UAE government promulgated the Federal Decree Law No. 37 of 2022 Concerning Family Companies (Businesses) (“Family Business Law”).
‘One of the key provisions of the Family Businesses Law is its emphasis on family charter or family constitution’
The Family Business Law, through its provisions, aims to simplify the day-to-day challenges faced by family enterprises, including succession, qualification of working members, rights of members who are not active participants, business continuity, as well as the need for external capital that may be injected by non-family shareholders.
The legislative framework of the Family Business Law aims to establish a clear and accessible legal regime governing family-owned businesses, encompassing ownership, governance, and intergenerational transfer. The objectives of the Family Businesses Law are threefold:
- To ensure the continuity of family businesses and thereby strengthen the private sector’s contribution to economic growth and community well-being within the UAE.
- To provide effective and efficient mechanisms for the resolution of disputes arising within family-owned businesses.
- To enhance the contribution of family businesses to the UAE’s economy and overall competitiveness.
One of the key provisions of the Family Businesses Law is its emphasis on family charter or family constitution.
What exactly is a family constitution?
A family constitution is a document that is drafted by the family members, taking their family values and belief system and reflecting it in the working and processes of their family business.
Why is it so important to have such a document?
Although a family constitution is not legally binding, there are several benefits that warrant having a family constitution extremely worthwhile such as building a structure for future generations and setting out guidelines to ensure internal cohesion.
The Family Businesses Law also provides that family-owned business “may have a charter containing rules for ownership, objectives and values of the family, mechanisms for evaluating shares and methods of profits distribution, education and qualification of the family members to work in the family company and its subsidiaries, and consideration of the family disputes related to the family company, and other rules and provisions.”
In addition to this, such charter may also specify the minimum educational qualifications and practical experience to be held by the family members to work in the family company and its subsidiaries.
Our Firm has advised several family businesses across the Middle East and Europe that use the charter to cover various aspects of the family business. Some of the key highlights are listed below –
1) A simple document minus the legal jargons
When it comes to a business, there are several documents that are advised and drafted over time such as shareholders’ agreements, memorandum, articles, by-laws and so on. However, all these documents are complex legal drafts riddled with legal jargon and often times, family members may find themselves struggling to understand several aspects of such documents. Moreover, these documents do not underline and annotate family values and beliefs that the family business is based on to begin with.
Therefore, a simple document underlining the family values, philosophy, family’s history and mission for the present and the upcoming generations may hold much more meaning to the family members and also present a much more enduring picture for how the family business should be managed and what values should be followed by future generations.
2) Creating a framework and guidelines to avoid possible conflicts
A family constitution helps create guidelines surrounding roles and responsibilities, allowances and withdrawals by the family members, profit and dividend distribution, budgeting of the expenses, benefits of each family member including those actively involved in the management and those who are passive members. Such guidelines can help avoid, to an extent, probable conflict within the family and help streamline each member’s roles and responsibilities so as to ensure the entire burden is not on the shoulders of a handful of active family members.
3) Internal cohesion
By providing a stable framework and guidelines for working together, a family constitution brings more understanding, compatibility, and builds internal cohesion among family members. This, in turn, results in a more efficiently managed and, in most cases, more profitable family business.
4) Paving the way for future
A family business aspiring to become more professional and looking to gain visibility on a commercial level must have a family constitution setting out key aspects of the family business such as devising a professional structure with a board made up of both family and some external professional advisors, a family council, a clearly defined employment and governance policy, and a well-structured succession plan among others. A family business with such a structure is more likely to have a much better economic success than its peers. Additionally, a well-structured family business also increases the chances of a possible merger, buy-out and even IPOs and future listing.
5) Building a framework for future generations
A family business will always have people entering and leaving the governing body. In such cases, a family constitution is extremely helpful as it can help provide guidelines for such transitioning members. Those who are leaving will know what benefits and powers they will still retain and those who are entering will get familiarized with the family values, ethics and beliefs as well as the governing policies and structure of the business.
6) Dispute Resolution
A family business with multiple family members is always prone to having conflicts and disputes. A family charter may help avoid family disputes and conflicts, but sometimes they may be inevitable. However, a family charter can provide ways and manner to resolve such disputes and conflicts. Whether it is internal discussion or professional mediation, a family charter can provide for some binding as well as non-binding ways of dispute resolution.
Implementation:
It is important to note that as per the Family Businesses Law, in the event of a conflict between the Memorandum of Association and the family constitution/charter, provisions of the Memorandum of Association shall apply, and any provision contradicting the Memorandum of Association shall be repealed from the charter. It is, therefore, important to incorporate certain vital and significant provisions of the family constitution into the Memorandum of Association of the family business.
In short, a family constitution can bring a lot of cohesion and harmony as well as streamline the management of a family business. Having said that, just drafting a family constitution may not be enough; it is important to properly implement and bring into practice the guidelines and processes outlined under the document.
For more details on how Al Midfa & Associates can assist you in structuring your family business or preparing your family constitution and related documents, please contact us here.