Six centuries ago, the polymath Ibn Khaldun diagnosed a fatal cycle in the life of dynasties. He posited that glory is built by a generation of construction, maintained by a generation of imitation, and inevitably destroyed by a generation of consumption. This is not merely historical philosophy. It is a statistical reality. Less than 15% of family businesses globally survive past the grandchildren’s tenure.

In the United Arab Emirates, where family conglomerates contribute approximately 60% to the Gross Domestic Product (GDP), the legislator has intervened to break this deterministic cycle. We are witnessing a shift from biological inheritance to sustainable wealth management.

“The ‘Third Generation Curse’ is the single greatest threat to economic continuity in the Gulf. The new legislative ecosystem is a survival mechanism for keeping business in family’s hand.” — Bianca Gracias, Crimson Legal

Crimson Legal positions itself as a specialized legal consultancy in the United Arab Emirates dedicated to family wealth management and the preservation of multi-generational legacies. The firm leverages the robust regulatory framework of the Dubai International Financial Centre (DIFC) to provide a secure environment for protecting and transferring assets, capitalizing on the region’s preferential taxation and stimulating economic conditions. Committed to guiding families through the UAE’s evolving legislative landscape, Crimson Legal offers tailored solutions that not only ensure legal compliance but also align with the state’s vision for economic excellence and legacy sustainability, helping family businesses transition from traditional structures to institutionalized governance.

Through Federal Decree-Laws and specific Free Zone regulations, the State provides the tools to institutionalise legacy. However, these tools require active implementation.

1. The Unified Registry: A Strict Barrier to Entry

Ambiguity is the enemy of succession. Previously, the line between a ‘family business’ and a standard commercial entity was blurred. The Federal Decree-Law No. (37) of 2022 on Family Companies (the “Family Company Law”) resolves this by creating an opt-in mechanism.

This legislation applies exclusively to companies where the majority owners consent to registration in the “Unified Registry”. It is not automatic. You must choose to be protected.

Scope and Exclusions

While the law encompasses most corporate forms recognised in the Commercial Companies Law, it explicitly excludes Public Joint Stock Companies (PJSCs) and General Partnerships. Crucially, regarding the structuring of these entities, the legislation removes the maximum cap on the number of shareholders. This allows for the expansion of family participation without forcing a public listing.

Legislative Insight: Article 4

• Family Companies must be entered in the Register prepared by the Ministry.
• The Ministry issues a specific document evidencing this registration.
• For companies in Sharjah, Decision No. (31) of 2024 mandates including “Family Company” in the Memorandum of Association.

2. The Family Charter: Converting Values into Binding Law

Historically, family constitutions were “gentlemen’s agreements”—morally weighty but legally toothless. When conflicts arose, these documents were often disregarded by the courts in favour of the standard Memorandum of Association (MoA).

The new law reverses this dynamic. Families are now empowered to draft a Family Charter relating to ownership, values, and education. If these provisions are incorporated into the company’s constitutive documents, they become legally binding.

Critical Components of a Binding Charter

To ensure your Charter holds weight, it must address:

• Qualification: Clear criteria for family members wishing to join the operational side of the business.
• Valuation: Pre-agreed mechanisms for valuing shares to prevent disputes during exits.
• Profit Distribution: Formulaic approaches to dividends that remove ambiguity.

According to Article 6, in the event of a conflict, the MoA prevails. Therefore, the Charter must be mirrored in the MoA to be effective. This is a critical step in proper corporate structuring.

3. Is it right to separate the owners from the management?

A common failure point in the third generation is the “competence gap”. Heirs may possess the right to own, but lack the skill to manage. To prevent asset mismanagement, the legislation introduces Multiple Classes of Shares.

This allows for a sophisticated operating model where control remains with the competent, while financial benefits are distributed broadly.

Structuring Voting Rights

Under Federal Law:

• Shares A: Confer rights to receive profits and vote in the General Assembly. These are reserved for family members active in management.
• Shares B: Confer rights to receive profits exclusively. These are suitable for silent beneficiaries.

Under Sharjah Regulations: The framework explicitly allows for non-voting shares. This facilitates profit distribution to the wider family without diluting the administrative control required for agile decision-making.

4. Family wealth management in DIFC

The concept of the Trust (or Waqf) has evolved from a religious endowment to a robust corporate vehicle. Recent reforms in both Federal and DIFC jurisdictions have fortified the ability to ring-fence assets.

DIFC Amendment Law No. (1) of 2024

The Dubai International Financial Centre (DIFC) has reinforced its position as a premier jurisdiction for wealth planning through three key mechanisms:

1. Severability: Families can subject real estate assets to specific jurisdictional laws (e.g., Sharia compliance) while financial portfolios are governed by common law principles within the same structure.
2. Creditor Protection: The reforms impose strict burdens of proof. To challenge asset transfers to a Trust, a creditor must prove intent to defraud or insolvency at the exact time of transfer. This makes the Trust a formidable fortress against future liabilities.
3. Structural Flexibility: New provisions allow for the splitting or merging of trusts to accommodate the changing needs of beneficiaries.

Federal Decree-Law No. (31) of 2023: Effective from September 2023, this legislation grants independent legal personality to the Trust. The Trust itself can own assets and enter contracts, separating the liability of the assets from the liability of the beneficiaries.

5. Liquidity and Exit Strategies: The 30% Rule

Family businesses often implode when a family member demands an exit, forcing the sale of assets to pay them out. Alternatively, a family member might sell their stake to a hostile third party to gain liquidity.

To immunise the company against these risks, the law grants the family the right to impose restrictions on share disposal. Most significantly, it permits the company to purchase its own shares (Buy-back).

Article 11: The Safety Valve

The Family Company may purchase up to 30% of its own shares in specific scenarios:

• Reduction of capital.
• Purchase or redemption of shares from a partner wishing to sell.
• Acquisition of shares from a bankrupt or insolvent partner.

This ensures that a family member seeking liquidity can exit without forcing a sale to external parties, preserving the family’s hegemony over the entity.

6. Dispute Resolution and Privacy Protocols

Litigation is public. For a family business, reputation is currency, and public disputes are a devaluation event. The legislator has organised a tiered system for dispute resolution to keep family disagreements out of the public eye.

The Tiered Approach

1. Internal Conciliation: Priority is given to mechanisms defined in the Family Charter (Family Councils).
2. The Committee: Article 19 establishes a specialized Committee to adjudicate family disputes. It acts swiftly, with a mandate to resolve grievances within three months.
3. Arbitration: If internal mechanisms fail, venues like the Sharjah International Commercial Arbitration Centre (Tahkeem) provide a private platform for resolution.
4. Judicial Immunity (DIFC): Trusts established in the DIFC enjoy immunity from foreign court judgments that contradict DIFC principles, preventing hostile foreign rulings from piercing the corporate veil.

“The shift from the ‘Asabiyyah of Blood’ to the ‘Asabiyyah of Law’ is the only way to ensure the legacy outlives the founder. Institutionalisation is not optional.”

Frequently Asked Questions

What is the primary benefit of the Unified Registry?

Registration creates a legal distinction for the entity, allowing it to utilise specific statutory protections such as share buy-backs, weighted voting rights, and specialized dispute resolution committees that are not available to standard commercial companies.

Can we restrict a family member from selling their shares to an outsider?

Yes. The law allows the Family Charter and MoA to include “Right of First Refusal” clauses and restrictions on share alienation. Furthermore, the company itself can buy back the shares (up to 30%) to prevent external entry.

Is the Family Charter enforceable in court?

The Charter becomes legally binding only if its provisions are incorporated into the Memorandum of Association. A standalone Charter may still be treated as a non-binding agreement. Proper drafting and integration are essential.

Does the new law apply to existing companies?

Existing companies can opt-in to the regime by adjusting their status and registering in the Unified Registry, provided they meet the criteria of majority family ownership.

Disclaimer: This article provides general information and does not constitute legal advice. Laws in the UAE are subject to change. Please contact Crimson Legal for a consultation regarding your specific situation.