New law to be ready in 2-3 years

In the context of the unique legal challenges faced by GCC family business, Family Business Network’s (FBN’s) white paper has come up with a few recommendations. Highlights of recommendations :

A. Family charter

To avoid disputes and challenges to the authority and vision of the founders and management of a family business, it would be useful to have the ‘Family Charter’ or ‘Family Constitution’ deemed a legally enforceable document, so long as it addresses appropriate and designated topics.

B. Approval requirements for share sales

To prevent disgruntled family members from selling their shares and diluting the family ownership or alternatively using their power to exit the company as a threat to influence management decisions, it would be helpful if share sales required pre-approval from the other partners in the company before they can be sold.

C. Buy-back of shares

It would be useful if a buy-back of shares by the company itself was permissible. In situations where existing shareholders cannot buy all the shares being offered by the selling shareholder, the company could step in and purchase the balance shares or alternatively, all the shares, if necessary.

D. Lock-In period

Another useful measure could be to permit the incorporation of a ‘lock-in period’ in the constitutional documents of an entity. This would entail restricting shareholders from selling their shares outside the existing shareholders for a specified period of time, perhaps for 3 to 5 years.

E. Ceiling on number of partners in an LLC

Currently in most countries across the GCC, there is an upper limit on the number of partners (i.e. shareholders) for an LLC. For instance, in the UAE, the maximum number of partners an LLC can have is 50. Especially given the large sizes of families in the region, it would be useful, for family companies, to increase this number to 200.

F. Differential voting rights

In most GCC countries, there is no concept of carrying different voting rights for an LLC which means every shareholder has the same voting power. This is problematic for family businesses with large numbers of shareholders of all ages. Having shares with differential voting rights should be made permissible to enable key stakeholders in the family business to have more say.

G. Non-competition provisions

It would be useful to introduce a restriction on partners in a family company preventing them from competing with the business of the company. This would mean partners cannot invest or participate in other businesses engaged in the provision of the same services as the family company.

H. Dedicated law for family business

Based on a private initiative by FBN GCC, a draft family business law has been presented to the Government of Dubai for further discussion. If approved, this draft may also be presented for discussion at the Federal level.

I. Ability to contract out of Sharia Courts

Where a family Waqf structure has been implemented, it would be useful if local laws across the GCC permitted family members to contract out of the jurisdiction of Sharia courts in favour of arbitration or a special court, if it is specified in the Waqf deed.

J. Freedom to apportion beneficiaries under a Waqf

It would be useful if under a Waqf, local laws permitted the founders to apportion the Waqf assets (even if greater than 1/3 of the founders’ total assets) to beneficiaries in the size and manner they deem fit.

K. Temporary Waqfs

Some countries across the GCC, such as UAE, Bahrain and Kuwait, may permit temporary Waqfs. It would be beneficial to issue decrees with the appropriate legal backing to make this a consistent practice across the GCC.