Last month, the Dubai government passed a new family business law. The law sets out to: promote the preservation, sustainability and scalability of a family's collective wealth; promote cohesion among family members and ensure the smooth transition of the family business from one generation to the next.
The law, No. 9/2020, is an acknowledgment of the significant contribution made by family businesses to the economic and social development of the UAE.
In a global context, legally speaking, while family businesses are identified and recognised as a distinctive business model, legal scholars and practitioners traditionally operate within a contractarianism model of business law, which holds that a business is made up of a nexus of contracts among economically rational actors. Therefore, when it comes to family business, the ‘fuzzy’ nature of the family element is often disregarded or perceived as an area that is not regulatable from a legal standpoint.
In family businesses, the interaction between the collective family, individual family members, and the business and family capital constitutes an intricate system with important implications for the company’s overall performance and sustainability. A family business is not just a relationship of business contracts or ‘shareholders’, but the sum of all bargains among stakeholders that affect the family business.
Today, there is a range of literature on how to manage and govern family businesses, manage conflict within a family business as well as on succession planning, not to mention the numerous conferences and studies that are held on the topic both regionally and globally. However, so far the law governing business organisations has not adequately accounted for family relationships, despite the fact that most businesses across the globe are family-owned.
Both the law and lawyers love certainty, but to date there has been no definitive family business law anywhere in the world to offer it. Though family businesses make up large percentages of nearly every industry – falling between the intersection of family law and business law – their legal directives lack a general framework for integrating mixed familial and business elements.
Therefore, Dubai's family business law is a bold attempt to make up for the void at the intersection of business and family law. As extensions of family life, family businesses are defined by broader economic goals and more intimate associations.
The pay-off for placing family considerations within the contractual agreements of the family business is twofold.
Firstly, the law recognises that underlying non-economic concerns of family life are central, not ancillary, to the structure of the business and family members’ mutual expectations. In addition, family relationships also have a habit of intruding on business matters. Therefore, when family circumstances or events introduce uncertainty, a constitution that is legally recognised and enforceable as a contract offers a tool to resolve disputes.
Secondly, a contractual perspective can help catalogue an array of questions one would ask in developing default rules tailored to the needs of a business-owning family. This is primarily because family members’ agreements regarding family, business and financial matters interrelate and should never be treated in isolation. A properly drafted family constitution can marry the rational and tangible aspects of family business, such as ownership rights, objectives and family employment policies along with the fuzzy, relational elements that involve or stem from emotional responses.
Ultimately, the objective of the new law is to support the voluntary participation of family members in a shared venture by setting out and managing their expectations. If properly informed, an agreement or family constitution has the potential to overlay relevant business and family considerations simultaneously.
It also reaffirms the central purpose of creating contractual documentation as a means of empowering individuals to take control of their own affairs, which is particularly critical in a family business setting where the members’ relationships are multifaceted and certainly impact both business planning decisions and choices.
Given that family matters can have a considerable influence on business law outcomes, a family constitution can bridge inescapable elements of family law that will ultimately influence business law, such as who the business’ members are, what the obligations they owe to one another are, and how the assets of a company will be controlled. All of these are key provisions and a properly constructed family agreement can therefore support in successfully avoiding family conflicts but also navigating and resolving them effectively.
The new law can serve as an invaluable tool for families in business in building and promoting harmonious family relationships as well as the success and sustainability of family businesses over the long term.
Yasmine Omari is executive director of the Pearl Initiative, a non-profit organisation aimed at promoting of corporate governance, accountability and transparency across the Gulf