August 4, 2016

Legal Corner: Considerations for Family Businesses

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It is reported that around 70% of the GCC’s businesses are family owned or controlled, making such businesses an integral part of the region’s commercial landscape. However, statistics show that only 30% of family businesses survive under the management of the first generation after the founders, and significantly fewer survive under the management of the second generation.

From a legal perspective, there are several ways to prevent the commonly seen collapse of family businesses, and to ensure their continued success. This article discusses four areas of focus for a family business from a legal perspective that are likely to significantly enhance the prospects of continuity:

 

Succession planning

A binding succession plan, which clearly streamlines transition of the business from generation to generation must be implemented, both for Muslim and non-Muslim families;

 

Family institutions

The interaction between the family and the family business should be structured. This can be achieved by introducing family bodies, which depending on the size of family and the business, may include:

  • a family assembly: a forum for the business leaders to meet and communicate with the family
  • a family council: when the family assembly reaches a critical size, usually 30 members or so, a more focused family council is established to represent the family assembly. The council may be elected by the assembly
  • a family office: separate from the business of the family, this office manages and caters to transactions within the family, personal investment planning, taxes, accounting, banking, and other matters relevant to individual family members
  • committees: depending on the objectives of the family, committees may be formed for the benefit of the family, to focus on areas such as education, career planning and family recreation

 

Family protocols

Also known as a family constitution, this is a document that brings together the values and vision of the founders. It establishes the family institutions and provides for their role and governance, and interaction between the family and the business, along with various other matters. This is often the document that holds the family and the business together, particularly in difficult times; and

 

Corporate restructuring

As family businesses grow, they often incorporate different types of entities, in different jurisdictions, with varying degrees of shareholding, without a clear corporate structure or plan. Such structure often becomes inefficient and costly from a tax, administrative, legal, accounting, risk and liability, and operational perspective. A strong corporate structure should be introduced before further growth. For governance structures and operational policies to be effective, they must align with the core values of the family and the family business. The challenges faced by family businesses, particularly those transitioning from the founder generation, can be offset by taking the time to understand in depth what the unique aspects of the family input are, and how the four initiatives cited in this article, amongst various others, can help ensure the continuation and prosperity of the founders’ vision.

 

This article is written by Hamad Haider, Partner in the corporate team at PwC Legal Middle East, Dubai. Hamad can be contacted at hamad.haider@pwclegal.co.ae / +971 (0) 4 304 3786.

Topics: Legal Corner

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