Family Companies Law: How It Regulates Ownership, Governance and Business Continuity

Definition of a Family Company and the Law's Scope

The law defines the "family" as relatives by blood and marriage, and defines the family company as any company incorporated under the Companies Law in which the majority of shares or stakes are owned by members of a single family and which is entered in the Register. Its provisions apply to any family company existing when it came into force or incorporated thereafter whose majority owners decide to register it. The company may take any corporate form, including the sole proprietorship company, while the public joint stock company and the general partnership are excluded.

Application in Free Zones and the Emirates

In financial and non-financial free zones the law applies to the extent that it does not conflict with the legislation of the relevant free zone. Where an emirate has local legislation regulating family companies, that local legislation prevails, and the federal law applies only to matters it does not regulate, while companies may still be permitted to register in the unified Register.

The Unified Family Companies Register

Eligible family companies are entered in the Register maintained at the Ministry of Economy in coordination with the competent authority, and the Ministry issues a document evidencing the registration. Under Ministerial Resolution No. (109) of 2023, registration requires that the company be of a non-excluded form, that the majority of its shares be owned by members of one family, that the majority owners decide to register, and that it have articles of association compliant with the law.

Registration Data and Its Amendment

A registered company is allotted a registration number prefixed with the letters "Sh A" used as its identifier. The company must apply to record any amendment to the registration data within (30) business days; where the amendment concerns the responsible manager or the board, it must be updated within (3) business days. No register data is published except a list of the names of registered family companies.

Articles of Association and the Family Charter

The articles of association of the family company must comply with this law and the Companies Law, and the Ministry prepares indicative articles for guidance. The family may have a "charter" containing rules on the family's ownership, objectives and values, mechanisms for valuing stakes, methods of distributing profits, and the qualification of family members to work in the company. The charter or its amendment is approved by a majority of the family council members, or by a majority of the family partners where no council exists, and a copy may be deposited in the Register.

Where the Articles Conflict with the Charter

If the articles of association conflict with the charter, the articles prevail and any charter provision conflicting with them or with the law is void. Where a provision is absent or ambiguous, the articles and charter are interpreted in line with the common intent of the founders and partners and in a manner that preserves the company's continuity and its transfer between generations.

Organisation of Ownership and Share Classes

By way of exception to the Companies Law, a family company may be owned by any number of partners, and its capital consists of stakes granting their holders equal or differing rights in the company's profits as agreed in the articles. Two classes of stakes may be issued: Class (A) granting the holder the right to profits and to vote in the general assembly, and Class (B) granting the right to profits only without voting, with the possibility of stipulating conditions for converting one class into another or for further classes differing in value, voting power and priority rights.

Disposal of a Partner's Stake and the Right of Redemption

If a partner wishes to dispose of his stake he must first offer it to the other family partners; he is excepted where he transfers it to his spouse or to any relative up to the first degree. A stake may not be disposed of to a non-family member except with the approval of partners holding at least three-quarters of the capital, unless the articles provide otherwise. Where a third party acquires a stake outside these cases, the remaining partners may seek to redeem it within (60) days; failing that, it is offered to the company, and if it is not redeemed within (30) days the third party is enabled to take it.

Right of Redemption Upon Concentration of Ownership

Where a single partner comes to hold no less than (90%) of the company's stakes, the remaining non-family partners must be notified of his wish to buy their stakes. Where his holding reaches (95%) of the voting stakes, the remaining family partners must likewise be notified. The price of the stakes is determined by the mechanism set out in the articles or charter; where these are silent, the committee values the stake through experts at the buyer's expense.

The family company may purchase no more than (30%) of its own stakes in two cases: reducing its capital, or buying the stakes of a partner wishing to sell, or who is bankrupt or insolvent, where no buyer exists among the partners, subject to the approval of the majority of stakes represented in the general assembly.

Inheritance and Continuity of the Company

Family members' organisation of the rules on ownership and transfer of the company's stakes or assets — whether by sale, gift or usufruct — is not deemed contrary to the Personal Status Law where it is completed during the life of the disposing partner. The heir is entitled to remain a partner to the extent of the inherited stake or to dispose of it, observing the rules on a partner's disposal. Upon the death of a partner, the company's manager — unless the articles provide otherwise — stands in the place of the guardian over the deceased's stakes and supervises their transfer to the heirs, each according to his lawful share.

Death Does Not End the Company's Status

The status of the family company is not lost by the death, interdiction, bankruptcy or insolvency of a partner unless otherwise agreed in the articles, and the partners are granted a period of (3) months from the date of the event to adjust the company's position, extendable by decision of the competent authority. The status is lost, however, if persons from outside the family come to hold the majority of voting stakes, whereupon the company is struck off the Register.

Management of the Family Company and the Manager's Obligations

The company is managed by a manager appointed in the articles of association; failing that, he is appointed by a subsequent decision of partners holding at least (51%) of the represented stakes, and may be one or more persons from among the partners or others. A limited liability family company may form a board of directors. The manager must exercise due care, refrain from competing with the company's activity, submit an annual report to the partners, dispose of the company's assets only in furtherance of its purposes, and be fair between partners and independent in his opinion.

Distribution of Profits

The family company must distribute part of its annual profits at the end of each financial year to its partners, each in proportion to his stake, unless the articles provide otherwise. The manager distributes the profits in the manner decided by the general assembly and provided for in the articles, and may deduct from any partner's profits any amount owed by him to the company.

Governance of Family Affairs

The governance of family affairs in relation to the company may be organised through the establishment of councils and committees, a family assembly, a family council and a family office, which handle the family's affairs, educate and train its members, separate the ownership of the family's private assets from that of the company, oversee its investments and charitable activities, and monitor conflicts of interest and reconcile viewpoints. The Ministry issues general indicative rules to organise this governance.

Settlement of Family Company Disputes

The articles or charter may provide for a council to reconcile partners and family members. Where none exists, or its conciliation efforts fail within a maximum of (3) months, or it is agreed not to refer the matter to it, the Family Companies Disputes Committee hears disputes arising from the articles or the company's management or ownership. The committee decides within a maximum of (3) months, extendable, and may take precautionary and urgent measures to preserve the company's continuity. Its decisions are appealable, with the option to agree on arbitration or to resort to the courts of the financial free zones.

Application of the Law in the Emirate of Dubai

Dubai has complemented the federal framework with local legislation. Decree No. (45) of 2022 established the "Family Companies Centre" at the Dubai Chambers, tasked with developing a strategy to support family companies and family property, building the skills of partners, founders and their children, preparing indicative templates for articles of association and governance codes, and providing advice on incorporation and on regulating family property.

The Disputes Committee in Dubai

Under Resolution No. (14) of 2023, a "Family Companies and Family Property Disputes Committee" is formed within the Courts, chaired by a judge of no less than appeal-judge rank with two members of experience. It has jurisdiction over disputes that the Centre is unable to settle amicably, and in particular: the termination of a family property contract or of a company's status or its striking off, the determination of the price of stakes and the right to redeem them, and the cancellation of changes to share classes. Its decisions are appealable before the competent court.

Benefits and Incentives for Family Companies

The Cabinet — upon the proposal of the Minister of Economy and after coordination with the concerned entities — may issue decisions on the benefits and incentives granted to family companies entered in the Register and the related controls. The competent authority in the emirate may likewise grant any further benefits and incentives under the controls issued in this regard. The family company is subject, in respect of matters not specifically addressed, to the provisions of the Commercial Companies Law, without being deemed a new form added to the forms of companies.

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