SHARJAH’S NEW LEGAL FRAMEWORK FOR FAMILY BUSINESSES: EXECUTIVE COUNCIL RESOLUTION NO. 31 OF 2024

07 December 2024

Shuchi Goel

On October 1, 2024, the Sharjah Executive Council introduced Resolution No. 31 of 2024, a landmark legal framework designed to regulate, govern, and ensure the continuity of family businesses in the Emirate. This resolution seeks to support the long-term stability and growth of family businesses, which are integral to Sharjah’s economic fabric.

Sharjah: The resolution emphasizes the importance of ensuring family businesses can transition smoothly across generations. By minimizing disruptions and providing clear operational guidelines, the legal framework strengthens the economic contribution of family businesses and promotes stability within Sharjah’s business ecosystem.

 The key provisions of the resolution

1. Formalization of Operations: Family businesses are now required to formalize their operations through clear legal structures, such as the creation of Articles of Association (AoA). A unique provision mandates the inclusion of the term "Family Business" in the AoA, signifying the business's commitment to maintaining ownership within the family.

2. Legal Forms and Ownership: The resolution outlines several legal forms that family businesses can adopt, including the Private Joint Stock Company (PJSC) and the Limited Liability Company (LLC). These forms allow businesses to operate within well-defined legal frameworks, ensuring transparency and accountability.

3. Flexibility in Shareholder Rights: Family businesses can issue shares that either provide voting rights or profit rights, allowing flexibility in structuring ownership. This is particularly beneficial for families that wish to retain management control while allowing broader family participation in financial benefits.

4. Buy-Back or Redemption of Shares: Article 5 of the resolution states that a shareholder in a family business may not transfer their share to anyone outside the family. If a non-family member acquires shares in violation of the resolution, the family business has the right to recover those shares at an agreed value

In detail:

·        Ownership and Governance Provisions: The resolution mandates the inclusion of “Family Business” in the articles of association (AoA) of eligible entities and outlines permissible legal structures, such as Private Joint Stock Companies (PJSCs) and Limited Liability Companies (LLCs). These measures establish a transparent, accountable framework for family businesses, ensuring they operate within a clear legal structure.

·        Flexibility in Shareholder Rights: Family businesses can now issue two types of shares:

1. Voting and Profit-Sharing Shares – Granting shareholders both financial benefits and decision-making authority.
2. Profit-Sharing Only Shares – Allowing financial participation without voting rights.

This flexibility enables families to customize governance structures, balancing decision-making control with broader financial participation. For instance, core decision-making can remain with active shareholders while profits are distributed among a wider group of family members.

·        Share Buy-Back and Redemption Rules: To preserve family ownership, Article 5 prohibits transferring shares to non-family members. If such a transfer occurs, the family business is entitled to reclaim the shares through the following mechanisms:

• Agreed Value: Shares are repurchased at a mutually agreed price.
• Expert Valuation: If no agreement is reached, an expert appointed by the competent authority determines the share value.
• Mandatory Buy-Back: If a shareholder wishes to waive their shares and no family member buys them, the family business itself must purchase them.

These provisions ensure ownership continuity and protect the family’s control over the business.

·        Mechanisms for Resolving Disputes: The resolution introduces two-tiered mechanisms to address disputes:

1. Internal Councils: Family businesses can form a council comprising shareholders or family members to handle disputes. This approach promotes internal reconciliation and cooperation.
2. Arbitration via TAHKEEM: If disputes remain unresolved, they can be escalated to the Sharjah International Commercial Arbitration Centre (TAHKEEM), which offers expert and efficient arbitration services to resolve conflicts impartially.

·        Family Charter and Articles of Association: The resolution permits the creation of a Family Charter, detailing rules for ownership, profit distribution, and share assessments. This charter serves as a preventive measure against disputes by setting clear expectations for family members. In cases of conflict, the AoA takes precedence, ensuring a defined hierarchy of governance.

·        Endowment and Supervision: Under Article 7, family business properties can be designated as endowments in accordance with Sharjah’s Law No. 8 of 2018. Supervisors appointed by the Company General Assembly oversee these endowments to ensure effective management and transparency.

In Conclusion

The Sharjah Executive Council Resolution No. 31 of 2024 establishes a robust legal framework that addresses the complexities of family business operations. By supporting ownership continuity, introducing governance mechanisms, and providing clear dispute resolution options, the resolution ensures family businesses in Sharjah can thrive across generations. This initiative reinforces the economic stability and growth of the Emirate, safeguarding the vital role of family businesses in its economy.

ALKETBI TOUCH

ALKETBI experts and consultants can help you with the reorganization of your family business by providing clear and effective solutions tailored to your family unique needs. We specialize in drafting and reviewing essential legal documents, including the Articles of Association (AoA) and prospectuses, ensuring compliance with the latest regulatory standards. We offer personalized advice on structuring ownership, shareholder rights, and governance to safeguard family interests, while also leading and managing private placements and public offerings, guiding you through every step to optimize outcomes. ALKETBI comprehensive support ensures a seamless transition and continuity across generations, enhancing the long-term stability and growth of your family business, so you can focus on what truly matters: the success and legacy of your family business. Contact us for more!