Legal Framework for Family Businesses- The new Executive Council Resolution No. 31 of 2024

A new executive council resolution (Sharjah Executive Council Resolution No. 31 of 2024) (the Resolution) was announced on the 1 October 2024.  It establishes a comprehensive legal framework for the regulation, ownership, and governance of family businesses in the Emirate of Sharjah and is designed to support the continuity of family businesses across generations. By providing clear guidelines and mechanisms, the resolution aims to facilitate the smooth operation and growth of family businesses, which are a vital component of Sharjah’s economic landscape.

Support for Continuity and Economic Role

One of the primary objectives of the Resolution is to support the continuity of family businesses and enhance their contribution to the economy of Sharjah. By ensuring that family businesses can be passed down through generations with minimal disruption, the Resolution helps maintain economic stability and growth.

Ownership and Governance

The Resolution outlines specific requirements for the registration and operation of family businesses, including the requirement for an articles of association (AoA) and the inclusion of the phrase “Family Business” in the AoA.  It also specifies the legal forms that a family business can take, such as a Private Joint Stock Company (PJSC) or a Limited Liability Company (LLC).  These provisions ensure that family businesses operate within a well-defined legal structure, promoting transparency and accountability.

Enhanced Flexibility in Shareholder Rights

The Resolution allows family businesses to issue shares that either entitle the owner to obtain profits and vote in the Company General Assembly or to obtain profits without voting rights.  This flexibility can help in structuring the ownership in a way that aligns with the strategic goals of the family, such as maintaining control within a core group while allowing broader family participation in profits.

By differentiating between voting and non-voting shares, family businesses can tailor their governance structures to ensure that decision-making power remains with a specific subset of shareholders, typically those more involved in the business operations, while still distributing financial benefits to a wider family group.

Buy-Back or Redemption of Shares Acquired by Non-Family Members

Article 5 of the Resolution explicitly states that a shareholder in a family business may not transfer their share to anyone outside the family. This provision is designed to keep the ownership within the family. If a non-family member acquires shares in violation of the resolution, the family business has the right to recover those shares. The process for this is outlined as follows:

• Agreed Value: The family business may recover the shares at an agreed value between the parties.
• Expert Valuation: In the event of a disagreement on the value, an expert appointed by the competent authority will estimate the value of the shares.

If a shareholder wishes to waive their share and no other family member purchases it, the family business itself is required to purchase the shares.

These provisions ensure that the integrity of a family business as a family-owned entity is maintained, even in cases where shares might temporarily fall into the hands of non-family members. The structured approach to share buy-back and redemption helps in preserving the family’s control and continuity of the business.

Mechanisms for Dispute Resolution

The Resolution introduces mechanisms to resolve disputes related to family businesses, which is a critical aspect for any family. Article 9 of the resolution allows for the formation of a council of shareholders or family members to consider and resolve disputes.  This council aims to reconcile differences and resolve conflicts internally, promoting harmony and cooperation within the family business.

Role of Sharjah International Commercial Arbitration Centre

If the council of shareholders or family members is not formed or is unable to resolve disputes, the Resolution provides for the involvement of the Sharjah International Commercial Arbitration Centre (TAHKEEM).  Article 9 of the Resolution allows disputes to be presented to TAHKEEM to ensure that there is an effective, expert, and efficient mechanism for resolving conflicts within family businesses.

Family Charter and Articles of Association

The Resolution also allows for the creation of a Family Charter, which can include rules for family ownership, profit distribution, and mechanisms for assessing shares, among other provisions. The Family Charter can play a significant role in preventing disputes by clearly outlining the expectations and responsibilities of family members involved in the business. In case of any conflict between the AoA and the Family Charter, the provisions of the AoA will prevail, providing for a clear hierarchy of governance documents.

Endowment and Supervision

Additionally, the Resolution permits family business properties to be designated as endowments, subject to the provisions of Law No. 8 of 2018 concerning endowments in Sharjah.  A supervisor can be appointed for the endowment, whose powers and duties are determined by the Company General Assembly. Article 7 of the Resolution ensures that the endowment is managed effectively and transparently, further reducing the potential for disputes.

Summary

In summary, the Executive Council Resolution No. 31 of 2024 is significant given its comprehensive approach to regulating family businesses in Sharjah.  It provides a robust legal framework that supports the continuity and economic role of family businesses while introducing effective mechanisms for dispute resolution. By facilitating internal reconciliation and offering formal arbitration options, the Resolution ensures that family businesses can operate smoothly and sustainably, contributing to the overall economic stability and growth of the Emirate.

For more information on the above, please contact Ammar Haykal, (partner, Dispute Resolution and Head of Office, Northern Emirates) and Richard Catling, (partner, Corporate Commercial)