Succession Planning in the UAE
Succession Planning in the UAE – Family Businesses (“FBS”) are significant contributors to United Arab Emirates’s Gross Domestic Product (GDP), wealth creation and economic stability. However, research demonstrates that the survival rate of FBS over the generations is low. Several factors contribute to the low survival rate, from increased competition to lack of capital, with one of the key reasons being lack of succession planning.
It is typical for high net worth individuals to delay succession planning indefinitely as they believe there is no threat to their health and safety. In context of the impact of COVID-19, FBS in UAE are now concerned as health of family patriarchs is at risk. FBS increasingly recognise the importance of succession planning to safeguard family interests and to ensure preservation of wealth.
Succession planning is a mechanism through which the family patriarch sets out terms under which the business will be transferred to the future owners. It also includes a corporate governance framework setting out the roles and responsibilities of each family member and the rights and obligations of the management and board of directors. This briefing deals with the succession planning strategies which FBS may adopt within the legal and regulatory framework in UAE.
As trust is a common law concept, UAE does not recognize the concept of trusts except in Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”). A trust is governed by a trust deed and is created by a settlor who transfers property to a trustee who then holds legal ownership of the assets for the benefit of beneficiaries. While the beneficiaries do not have legal ownership of assets, they receive income from trust property or can receive the property itself.
Trusts are a solid asset holding structure where the assets remain within the family. For example, a settlor under a trust deed assigns an asset to his wife for life and on her death to their children. The wife cannot then sell the trust property to a non-family member, which is a possibility if the transfer is a gift.
The legal framework of trusts in DIFC is governed by DIFC Trust Law No.4 of 2018 (“DIFC Trust Law”) and is governed by Trusts (Special Provisions) Regulations 2016 in ADGM. DIFC Trust Law sets out that a valid DIFC trust is not voidable in the event that it conflicts with foreign law. There is a notion that “foreign law” in this context also refers to Sharia law. However, it cannot be stated with certainty that distribution of assets under a DIFC trust made for succession planning will not be voidable if it contradicts Sharia principles until this concept is further tested by the courts.
Family office is a privately held company for management of wealth, asset and legal affairs of families. There are two types of family offices: single-family offices (SFO) and multi-family offices (MFO). SFO is relevant when the assets of one single family are in question whereas MFO is used to pool the assets of multiple families.
DIFC, ADGM and Dubai Multi Commodities Centre (“DMCC”) have provisions for SFO. The applicable regulations are DIFC Single Family Office Regulations 2011, DMCC Company regulations 2003 and ADGM Companies Regulations of 2015 regarding restricted scope of companies.
A key requirement of SFO is that it must be wholly owned by the same family. Generally, a family is considered as a single family when all of its members are bloodline descendants of a common ancestor or their spouses, widows and widowers. Minors, step children and adopted children are also recognised in the single family under most regulations.
The jurisdictions differ with respect to the minimum share capital and investible funds requirement. ADGM does not have a minimum share capital or investible funds requirement. DIFC requires a minimum of USD 50,000 as share capital and minimum of USD 10 million as investable assets. DMCC requires a minimum of AED 50,000 as share capital or AED 10,000 per shareholder and a minimum of USD 1 million as investible or liquid asset.
FBS are typically run by one or two family members who run the business and some who play a passive role resulting in members having varied assumptions about their role in the business. The rights and obligations of members of the FBS therefore often remain undefined leading to disputes relating to succession, management and ownership. In order for the FBS to grow, it is recommended that the management powers are moved from family members to professional leadership.
Under a foundation, a founder will pass on its assets to a foundation which will hold those the assets in its name separate from the founder’s personal wealth. Foundations are managed by a foundation council and may be supervised by a guardian. Foundations have its own legal personality and can hold assets in its own right, unlike trusts. The founder may retain control under the by-laws by nominating himself as one of the council members or a beneficiary which is an advantage of a foundation in comparison to trusts.
In the UAE, FBS have options of setting up foundations in ADGM under ADGM Foundation Regulations 2017, in DIFC under Foundations Law No.3 of 2018 and in Ras Al Khaimah under RAK ICC Foundations Regulations 2019.
Family Business Law
Despite the fact that UAE business market is widely dominated by FBS, there had, until recently, been no legal framework governing FBS. His Highness Sheikh Mohammed Bin Rashid Al Maktoum issued Law No. 9 of 2020 regulating family-owned businesses in Dubai (“Family Business Law”) to bridge this lacuna.
The provisions of the Family Business Law applies at the request of the family members, who are joined by a common property and applies to movable or immovable property, shares in commercial companies, civil companies and assets of sole proprietorship except public joint stock companies.
The Family Business Law regulates the articles of the family ownership contract with respect to disposition of shares, formation of board of directors, appointment of a manager to manage the family property and functions and obligations thereof. The family ownership contract specifies the share of each partner in the family property and is initially valid for a period of 15 years which can be further renewed for a similar term subject to the agreement of all the concerned members. A well drafted family ownership contract should ideally address both business and family interests.
Succession planning is a continuous process, and it is recommended to start early with an agile approach as there is no one-size-fits-all model which caters to all families. FBS are increasingly using specialist advisors such as legal and financial advisors to facilitate succession planning. Decisions should be taken in context of the wishes of the family patriarch, nature of assets and the business requirements to ensure long term sustainability of the FBS.