“Nothing is constant but change”.
In the context of family businesses, a number of which are run by a single person, ignoring the ramifications of, and failing to plan for change could put the future of the family business in jeopardy in the event that the individual who manages the business is no longer able to continue in his role.
This article considers certain issues that may arise as a result of a lack of proper corporate and succession planning, and the challenges that local businesses, including family businesses, may face as a result.
A limited liability company that is incorporated in the United Arab Emirates (LLC) is required, pursuant to applicable law, to have two shareholders, one of which must be a UAE national or an entity that is wholly owned by UAE nationals who/that holds shares representing 51% of the capital of such entity (the Local Shareholder). Notwithstanding the Local Shareholder holding the majority shareholding in the LLC, in a number of cases, the minority 49% shareholder (the Minority Shareholder) may assume day to day management control of the LLC.
However, in the event that a shareholder dies, is incapacitated or is otherwise unavailable to continue in his/its capacity as a shareholder, complications can (and often do) arise.
Where the shares in the LLC are held by the Local Shareholder in his personal capacity, upon his death, the shares of the Local Shareholder would devolve to his heirs, and may be distributed as part of his estate, in accordance with the principles of UAE inheritance law (which are subject to Shariah law). From the perspective of the Minority Shareholder, this may pose a particular challenge as, among other things, there may be a conflict among the heirs and consequently obtaining a “Certificate of Heirs” (that sets out the names of the deceased’s heirs) from the Shariah court may be delayed. The heirs may also not be willing to cooperate with the Minority Shareholder or share the Minority Shareholder’s vision for the future of the business, and may attempt to become actively involved in the running of the business, despite any earlier agreement that may have been reached between the Local Shareholder and the Minority Shareholder.
In addition, the business of the LLC may be adversely impacted, particularly in respect of any key relationships (whether with business partners, employees or customers) which were led by the Local Shareholder, and in respect of operational issues such as control over the LLC’s bank accounts and dealings with governmental authorities, including UAE Ministry of Labour and UAE Ministry of Interior, which oversee the processes relating to employees of businesses in the UAE.
Further, in the event of the death of an individual shareholder, it may not be possible to complete, on an urgent basis, a transfer of shares in an LLC. The relevant commercial parties may have to incur considerable time and expense in resolving issues with the heirs of the individual shareholder, prior to coming to a position from which they can drive the business forward.
In light of such challenges, the stakeholders in such enterprises should consider implementing an appropriate corporate structure that permits the business to function whilst mitigating the risks that arise should anything untoward happen to the Local Shareholder or any other individual shareholder. It is often recommended that an individual partner’s stake in an LLC be held through a corporate vehicle and for an LLC to adopt an appropriate corporate governance regime so as to enable, among other things, more than one person to represent the LLC and act as its authorised signatory.
A number of family businesses in the UAE are structured in a similar manner, whether through an LLC or otherwise. Family businesses tend to be run by a single person or group of persons. In the event that the individual who controls the family business dies, the future of the business is put into jeopardy. It is therefore imperative that a robust corporate structure and succession plan is implemented during the lifetime of the patriarch, in order to ensure continuity of the business during a generational change. Depending on the size of the family and the nature of its interests, such structures may include the ‘corporatization’ of business lines and ring fencing of liabilities, and hardwiring the provisions of a family protocol document or family constitution into the constitutive documents of the LLC or all the entities that comprise the group.
A G1 family’s requirements in this regard may be substantially different to that of a G4 or G5 family, which would have several stakeholders, who may have competing interests and goals. However, irrespective of the longevity of the business or the constitution of the family, it is never too soon to consider the needs of a business and implement an effective corporate structure and succession plan that will ensure a smooth running of the business, irrespective of the circumstances of each shareholder, and a transition of the business to future generations.