Calls for more effective laws on succession of family businesses

Family businesses in the region worth US$1 trillion are set to be passed to the next generation over the next decade, creating the need for better laws to support them, say officials.

“It is expected in the next 10 years $1tn will change hands from generation to generation, so it is critical to see this transition take place smoothly without rocking the institutions that the founder had built,” said Abdulaziz Al Ghurair, chairman of the non-profit Family Business Network GCC (FBN GCC).

“Our legal system in all the countries in the Gulf is not really encouraging family business to do their transition smoothly,” said Mr Al Ghurair.

The FBN GCC was established in 2012 to help facilitate the continuity of family businesses in the Arabian Gulf region.

Family owned businesses contribute about 80 per cent to non-oil GDP within the Middle East region, according to the consultancy Deloitte.

Nearly half of respondents in a survey last year by Deloitte said they only reviewed succession plans when a change in management required it, and 41 per cent did not have leadership contingency plans.

Many founders of family groups leave succession plans until the last minute, creating headaches for families because heirs have to deal with legal hurdles that sometimes complicate any transition.

Continuity of management and ownership are the two biggest challenges facing family businesses, according to Fadi Hammadeh, general counsel for the Dubai-based family business Al Futtaim Group. He helped to co-author an FBN GCC white paper that seeks to provide recommendations to policymakers to improve the law for family businesses.

“Family businesses are not just important economically, but are important as a factor of social stability as well because they are the largest employer in our GCC countries,” said Mr Hammadeh. “Their continuity is not just beneficial for business owners, but also for government agencies depending on fees and tax income, for bankers, [etc].”

The legal landscape is forcing companies to book their assets abroad in jurisdictions such as the Cayman Islands to facilitate family business continuity.

In Dubai, the Dubai International Financial Centre has a trust law that is being used by some family businesses. The UAE has the most developed laws for family businesses, followed closely by Bahrain, according to Mr Hammadeh.

But a Sharia-compliant family business law should also exist onshore and across the GCC, said Mr Al Ghurair.

“We are trying to lobby, lobbying is allowed, to initiate some new legal system across the GCC to allow them [family businesses] to have a legal choice. Today the legal choice is very limited,” said Mr Al Ghurair.

In Dubai, FBN GCC has proposed a family business law that it hopes will be in place within three years, he said.

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