Explained: How UAE's new family business ownership law protects against 'hostile situations', surprise deals

A legal expert in UAE has explained the new family business ownership governance law stressing that it will ensure that family businesses stay in the family because it prevents shares from being sold to outside parties.

Last week, President His Highness Sheikh Khalifa bin Zayed Al Nahyan, in his capacity as Ruler of Abu Dhabi issued the new family business ownership governance law that further strengthens the sector’s contribution to the economy and facilitates the transition to successive generations.

Jimmy Haoula, Managing Partner, BSA Ahmad Bin Hezeem & Associates LLP has explained that one of the key attributes of the new law is the prevention of the sale of shares or dividends of family-owned businesses to individuals or companies outside the family.

“In order to do so, prior approval from family members is now required before any shareholder can sell an equity stake to a non-family member. This safeguards the business from potentially hostile situations or unpredictable deals which could negatively impact the operations of the business and the family shareholders within the company,” said Haoula.

“Owners of family businesses can also issue family-owned shares with weighted voting rights and prevent the pledging of family-owned businesses as encumbered assets, to avoid expropriation.”

On how the new law is different from the existing law, the legal expert says the current law does not apply to family-owned businesses where non-family members own more than 40 per cent of shares, whereas the new law will be applied to family-owned businesses on an opt-in basis for owners or co-founders by submitting a request to the Department of Economic Development (DED).

The DED will issue the implementing and administrative regulations to the new law in March 2022.

The law stipulates that no partner may dispose the share thereof to a person from outside the family, outside the framework of the law, unless by approval of all partners. In case a person from outside the family owns shares or equities in the company for any reason whatsoever, then the company may recover such shares at fair market value.

According to the law, family businesses shall no longer be entitled to the capacity and benefits granted thereto by virtue of this law in case the new partners from outside the family own more than 40 per cent of the shares. The dual voting shares lose their characteristics; the preference shares become ordinary shares or debts that the company shall immediately pay if its capital is reduced as per the amount of the preference shares written off.

According to authorities, the new law aims to further strengthen the family-owned business legislative ecosystem by following a sustainable economic model.

What is a family business?

According to the law, a company shall be deemed as a family business, regardless of its legal form, in case it meets the following:

The family business is established or its situations are adjusted to be in conformity with this law, by virtue of the articles of incorporation, bylaws and the annexes thereof, as stipulated in aforementioned Federal Law no. (2) of 2015 as well as the regulations related to the organisation of the economic activities in the Emirate of Abu Dhabi.