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Governance Legislation of family businesses in the emirate of Abu Dhabi

In his capacity as the Ruler of the Emirate of Abu Dhabi, President His Highness Sheikh Khalifa bin Zayed Al Nahyan has issued Law no. 10 of 2021 regarding the governance of family business in the Emirate of Abu Dhabi, to establish a comprehensive, clear and transparent legal framework for organizing family ownership in the emirate, to facilitate its transmission between successive generations with ease in addition to avoiding any disputes between members of the same family, and for the purpose of reflecting the solid position of Abu Dhabi in providing a legislative and regulatory environment that incubates business and attracting investments.

Whereas the term “Family” was defined according to the aforementioned law as the husband and relatives by blood or lineage up to the fourth degree, and the term “Founder” was defined as the one who found the business or participated in its establishment for the first time.

The scope of application of the provisions of the law to the business is based on the desire of all its owners, founders, or family members who have the ownership of the family business that takes one of the forms stipulated in Federal Law no. 2 of 2015, whether it was in existence at the time of this law's enforcement or it was established after the implementation of its provisions, upon a request submitted by them to the Department of Economic Development.

The aforementioned law defines the family business - its legal form - if any of the following cases are met:

  1. Members of the same family own the entire capital of the business.

  2. Ownership by members of one family of a business owned by several legal persons wholly owned by members of this family.

  3. Ownership of a single founder to a sole establishment, who allocates all or some of its benefits to the benefit of his family members.

  4. The family owns the majority of the business's capital or retains the majority of the votes in the event that partners from outside the family are included to the extent stipulated in this law.

  5. Allocating a portion of family business profits for the benefit of the beneficiaries, as decided by the founders or the business's regulations.

The aforementioned law also enumerated the characteristics and advantages of family businesses as follows:

  1. Whereas the founders have the right to stipulate in the memorandum of association that it is prohibited to sell shares to any individual or legal person outside the family or to specify the degree of kinship that allows the trading of shares, with the prohibition of this sale or disposal if the percentage of ownership from outside the family exceeds 40% of shares.

  2. The founders are entitled to issue their own shares with double voting, and this feature is transferred with the share in the case of succession.

  3. Finally, if the family business takes the form of a public or private shareholding company, it may issue preference shares without voting rights or redeemable shares pursuant to a general assembly resolution with a majority of 75% of its capital. The same resolution determines the characteristics of these shares with regard to the distribution of profits.

Moreover, the aforementioned law regulated the possibility of participation of partners from outside the family, as it permitted the family business (with the exception of the partnership companies) by virtue of a decision of the general assembly to sell part of its capital to partners outside the family or to increase the company's capital by introducing new partners and selling new shares according to the following :

  1. Applying the provisions of the priority rights reserved for partners in accordance with the legal form of the business. The provisions of the strategic partner's contribution to joint-stock companies shall also be applied, provided that in all cases, the ownership percentage of non-family partners does not exceed 40% of the company's total capital.

  2. The family company may issue preference shares without voting rights to the beneficiaries and transfer them to partners before starting the procedures for entering partners from outside the family. No partner may dispose of his share to a foreigner on behalf of the family outside the framework of the previous paragraph except with the consent of all partners, and in the case of foreign ownership shares in the company for any reason, the company has the right to exercise the right to redeem those shares at the fair market value.

The family business loses its character and advantages derived from the aforementioned law if the share of the new partners outside the family exceeds forty per cent 40%. In addition, the shares with double voting lose their characteristics, and the preference shares are transformed into ordinary shares or debts on the business payable immediately, provided that its capital is reduced as much as the preference shares have been written off.

The law has given a period of one year to adjust the situation after the death of one of the founding partners to transfer his shares to his heirs or by transforming into a private or public joint-stock company in case the number of partners outside the family exceeds the maximum permissible limit. This period may be extended by a decision of the head of the department based on a reasoned request. In the event of laxity in the application of this approach, the first living founding partner whose name is mentioned in the memorandum of association shall be considered the representative of these heirs.

The founders may include in the memorandum of association the method of liquidation in the event of determining the age of the company and redistribution of assets, provided that in the case of provision for in-kind liquidation, the ownership of shares and shares by non-nationals that will be liquidated does not lead to granting them any real estate or in-kind benefits that are not granted to foreigners under the applicable laws.

At the very least, we see this as a way to initiate family dialogue. For some family members, it can be hard to question the status quo in their family business openly, and the new law may give families an opportunity to put succession and governance issues on the agenda.


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