Family Business Governance in the Gulf: Charters, Councils and Ownership Transfer

Why does a family business need its own governance?

In a family business one person often holds several roles: family member, possibly owner of a stake, and possibly manager. The IFC Family Business Governance Handbook devotes a whole section to these multiple roles and the problems they cause. ^[1]

The trouble rarely shows while the founder is in charge; it appears as the family grows. A decision one person used to take becomes a debate among siblings, and then among cousins with different interests. The IFC handbook cites estimates suggesting that only a small share of family businesses survive into the third generation. ^[1]

What are the growth stages of a family business?

The IFC handbook divides a family business’s life into three stages. In the founder stage governance issues are limited because the founder owns and manages, and the key issue is succession planning and grooming the next leaders. In the sibling partnership stage ownership and management pass to the children, and maintaining harmony and formalising processes become priorities. In the cousin confederation stage, family employment, shareholder rights, liquidity, dividend policy and conflict resolution come to the fore. ^[1]

What is the legal framework in the Gulf?

Rules differ between countries, so do not assume that what applies in one applies in another.

UAE: Federal Decree-Law No. 37 of 2022 on Family Businesses was issued on 3 October 2022 and takes effect three months after the day following its publication in the Official Gazette. It defines a family business as a company established under the Companies Law, the majority of whose shares belong to one family, and which is registered as a family business. Registration is decided by the majority partners, and the law applies to free-zone companies to the extent it does not conflict with their own legislation. ^[2]

Saudi Arabia: Article 11 of the Companies Law allows founders, partners or shareholders, during or after incorporation, to conclude a family charter governing family ownership of the company, its governance and management, the employment of family members, profit distribution, disposal of shares and the settlement of disputes. The charter is binding and may form part of the memorandum or articles of association, provided it does not conflict with the law or those documents. ^[3] The law was issued by Royal Decree No. M/132 dated 1/12/1443 AH and came into force on 19 January 2023. ^[4]

In the other GCC states, check the local companies law and the commercial registry authority, and do not rely on a template imported from another country.

The family charter: what does it contain?

The family charter, called the “family constitution” in the IFC handbook, sets out the family’s values, vision and mission, and the roles, powers and relationships of shareholders, the board and senior management. It typically covers family institutions, board and senior management arrangements, and policies on employment, share transfers and CEO succession. ^[1]

Sources: ^{[2, 3]}

UAE law also allows the charter to set minimum education and practical experience for family members who work in the business. ^[2]

Family governance institutions

The IFC handbook describes two main bodies: ^[1]

• Family assembly: a formal forum where all family members discuss family and business issues. It usually meets once or twice a year and elects the family council. Before that, in the founder stage, the family typically holds informal family meetings.
• Family council: an elected working body, usually formed once the family exceeds about 30 members, ideally with 5 to 9 members, meeting two to six times a year.

In the UAE, the law allows family governance bodies such as a family association, family council and family office to be set up to manage family affairs and the family’s relationship with the business. ^[2]

The board and the employment policy

Separating the family council from the board is the core of governance: the council represents the family, while the board oversees the company. The IFC handbook recommends a board of 5 to 9 members, chosen for what they contribute to the business rather than family membership, including independent directors who bring an outside perspective and can balance conflicting family views. ^[1]

The employment policy sets the conditions for family members entering, staying in and leaving the business, and how they are treated compared with non-family staff, so that the business attracts the best talent without favouring or discriminating against family members. ^[1]

Two practical tests of whether the forums are truly separate: is a family manager’s performance discussed at board level by the same standards as a non-family manager’s? And are family job requests settled by the written policy rather than in private gatherings? If the answer is no, the governance exists only on paper.

Share transfers and dispute resolution

The sharpest disputes often begin when an heir wants to exit. In the UAE, a partner in a registered family business must first offer their stake to the other family partners; they may transfer it to a spouse or relatives up to the first degree without doing so; a sale to someone outside the family requires the approval of partners holding at least three-quarters of the capital, unless the memorandum sets a different percentage; and if a stake otherwise passes to a non-family party, the remaining partners may ask to buy it back within 60 days. ^[2]

UAE law also allows share classes, including shares carrying rights to profit and voting and shares carrying a right to profit only. A dispute goes to the Family Business Dispute Resolution Committee if a conciliation board, which the articles or charter may set up, fails to settle it within a maximum of three months, or if there is no such board. The committee must decide within three months, extendable by a similar period on a reasoned request; its decisions may be appealed to the competent court, and the parties may instead agree to arbitration. ^[2]

Hypothetical example: where does a second-generation family start?

A trading company is owned by three siblings after their father’s retirement. The eldest sibling’s son asks for a management job, while another sibling wants to sell part of their stake. There is no charter and no written policy.

The family starts by mapping who owns, who manages and who works in the business, then agrees its values and what it wants from the company: an income source, or a legacy to grow for future generations? The siblings then draft a charter with a legal adviser, covering first the conditions for employing family members, the share valuation mechanism and pre-emption, and then add an independent member to the board. They do not need a family council yet; a regular family meeting is enough until the family grows.

Conclusion

Family business governance starts by separating the roles of family, ownership and management, and then by a written charter that fits the companies law in your country. Begin with the rules that prevent the most common disputes, set up councils as the family’s current stage requires, and review the arrangements with each generation.