United Arab Emirates / Family Business and Private Wealth
Richard Catling Partner, Corporate Commercial
Nawal Abdelhadi Senior Associate, Corporate Commercial
Given the upheaval around the world caused by COVID-19 in the last 3 years, for business owners there has never been a better time to take a good, hard look at your business and ensure that it is established on sustainable footing. One key element to any business is succession planning and corporate governance.
Essentially, the lack of a succession plan and governance arrangements often lead to legal and financial problems as well as a result of the disruption of business operations. This risk increases materially when it comes to family owned businesses. Unfortunately, succession planning is often neglected or even avoided by families due to the difficult conversation it often engenders. There have been many examples, specifically in the region, over the past years where the absence of a succession plan has resulted in family conflict, disruption to the business and freezing of assets. The challenge is magnified by the application of Sharia inheritance rules and processes.
Notwithstanding that awareness of the importance of succession planning and governance has increased significantly in the region, there remains many examples of family owned businesses that are in danger of the risks resulting from the lack of a succession plan.
Founders often forget the fact that disagreements and family disputes emerge at transition when the founder is no longer there. The transition period is the most critical period to any family whether from a business point of view or from a personal point of view. The lack of a well-structured plan and clear guidelines to implement at transition can result in a catastrophic situation. So when founders are in good health and retain complete control of both, the family and the business, that is the line for these important decisions to be taken.
Adopting a succession plan does not necessarily mean that the founder must give up control or ownership. To the contrary, a proper succession plan will prepare for a smooth transition ensuring the continuity of the business as well as the family ties.
Whilst things may change along the way, a good succession plan will accommodate various scenarios that may evolve over time.
Doing “anything” is almost always a better option than “doing nothing”.
So what is the worst that can happen in the absence of succession planning at the time a founder passes away? The passing away of a founder will initially result in the temporary freeze on dealing with the assets and business of the founder specifically where the founder has sole management and signing authorities. Where Islamic Sharia applies, the processes and formalities may further complicate the situation.
Inheritance itself will result in fragmentation of ownership, decision making and loss of effective stewardship of the family wealth. This will inevitably lead to business disruption. Not all family members will be interested in maintaining the business and not all family members will have the skills to run the business. Lack of consensus on business leadership amongst the heirs creates another challenge. Reaching consensus whether on the running of the business or maintaining the assets will prove to be a cumbersome process specifically where the number of heirs is large; issues that are exacerbated by minor heirs or incapacitated heirs. The situation can get worse where there are power struggles amongst the heirs. This is in addition to the negative impact on third parties and financial institutions dealing with the business as well as the employees of the business itself.
Succession planning is often viewed as a cumbersome and cost consuming process by some families; in other circumstances, the misperception is that it is contradictory to Islamic Sharia. Succession planning is a process that differs from one family to another and from one business to another. There is no one-size fits all. While in some cases succession planning can require time and effort to build consensus, in other cases it can be straight forward and quick. Further, a succession plan can be designed to respect the principles of Islamic Sharia and comply therewith. In all cases the risks of the lack of succession planning far outweigh the risks associated with a lack of a plan.
Proper succession planning is a multi-step exercise which involves the corporatization and institutionalization of family assets and arrangements. A proper succession plan would typically involve quarantining the business and assets within a collective corporate structure with corporate governance as well as binding arrangements to reflect and detail stewardship and reflect and impose the family governance. The selection of such structure depends on many factors including the objectives and vision of the founder and the family, the arrangements to be implemented, the assets of the family and many more.
Preparing for the future has now become an easier task for family owned businesses in the region in light of the continuous efforts and initiatives the UAE government in creating legislative framework to accommodate the needs of family owned business owners.
The UAE is now offering several options for families around the region to restructure their business and put in place a robust succession plan to accommodate for the transition from one generation to another. The UAE offers, through its financial free zones, which are common law jurisdictions governed by a separate set of civil and commercial laws, enduring and cohesive legal structures to be administered in accordance with the wishes of the founders such as trusts and foundations. In addition, the UAE has recently introduced several laws, at both a federal level and an Emirate level, to provide families with legal frameworks for their succession planning including an onshore trust law. This is in addition to the legal structures and governance arrangements that can be established in light of the federal Commercial Companies Law. In all cases, when considering succession planning there is an appropriate structure for a particular family and careful consideration should be taken to ensure which one is the best fit.
It is never too early for any founder to start thinking about succession planning and preparing for the worst to avoid falling into the pitfalls other families have endured due to the lack of proper succession planning. Yet it is also never too late! Taking initiatives no matter how small would make a big difference to any family owned business in the future. Time is of the essence.
For further information, please contact Richard Catling or Nawal Abdelhadi.
Published in August 2022
