How a family charter becomes enforceable, and which parts never do

The Governance Guidelines published by the Dubai Centre for Family Businesses describe a family constitution as a moral obligation between family members to comply with the rules of engagement set out in it. The same guidelines describe how parts of it acquire legal force: "There are several mechanisms through which Shareholders can legalise their Family Constitution - principally through a Shareholders Agreement and/or through the Articles of Association." They add that a family constitution, as a document in itself, "when drafted correctly, and notarised before a notary public, or registered with the relevant authority, qualifies as a contract between the Parties". The guidebook published by the Dubai Department of Economy and Tourism with the Dubai Centre for Family Businesses records that, in line with the enactment of the federal and Dubai family business laws, family charters can be formalised as legally binding documents in the UAE.

The guidelines describe the scope of the first of those two mechanisms as follows: "A Shareholders agreement is an agreement entered into by Shareholders in a business. The agreement regulates the way in which the company is managed, how Shareholder decisions are made, the ownership and transfer of shares, Shareholder protection etc."

Matters that fall outside both mechanisms are set out as directly. The guidelines state that a comprehensive family constitution includes topics such as family vision and values, family employment, next generation involvement, the family office and matters relating to the welfare of the family, unity and cohesion, and that "Provisions on such items typically cannot be legalised through the Shareholders Agreement or Articles of Association."

The 2022 law widened what a registered family business may place in its constitutive documents. The guidebook records that, unlike the UAE Commercial Companies Law, the Family Business Law also allows companies to include the following in their articles of association or memorandum of association, with the article citations shown:

• creation of various classes of shares (Article 21.1)
• rights of first refusal in the event a shareholder wishes to sell their shares (Article 8.1)
• share buy-back options in the event of a capital reduction or the bankruptcy or incapacity of a shareholder (Article 11.1)
• a redemption right where one holder's stake becomes very large, which the guidebook describes as squeeze-out rights and which Article 9 in the Arabic text, which prevails, words as a duty on the holder who reaches 90 per cent of the shares, or 95 per cent of the voting shares, to notify the other partners of a wish to buy their shares, and as a right for those partners to sell at a price agreed between them or at a price the committee determines (Article 9)
• an unlimited number of shareholders in a limited liability company (Article 7.1)

The obligation Article 9 states is the obligation to give notice; the article sets no period within which the other partners must answer and states no consequence where they do not sell, and both official English texts render their position as a right or a permission to sell. Published commentary divides on the point, with some analyses describing Article 9 as a compulsory purchase and others as an exit route for the other partners, and no decision applying it is described here.

Published law firm analysis of the law describes the buy-back as subject to a maximum cap of 30 per cent of the company's shares.

Cabinet decisions announced by the Ministry of Economy in December 2023 set the procedure for two of these mechanisms. On a family company purchasing its own shares, the Ministry describes Cabinet Decision No. 107 as requiring general assembly approval authorising the board, an application to the relevant authority with a commitment to the obligations it sets, and a decision by that authority to approve or reject the request within 15 business days. On share classes, it describes Cabinet Decision No. 108 of 2023 as giving a family company the right to modify or revoke share categories or their associated rights, and as providing that where the rules for doing so are not defined in the founding documents, a resolution to make changes must be approved by a 75 per cent or more majority vote of the partners with voting rights.

The bridge between the two documents has a published template. The UAE Government Media Office recorded in January 2024 that the Dubai Centre for Family Businesses had issued a Sample Article of Association for Family Businesses, described as a starting point for families who wish to draft a new article of association or revive an existing one, and as allowing them to incorporate sections of the family constitution into it.

Two constraints apply throughout. The guidebook records that where the articles of association and the family constitution conflict, the provisions of the articles of association prevail, citing Article 6(3), so a provision left in the charter that contradicts the articles does not displace them. It also records that the law requires a family charter to be approved by a majority of the members of a family council.

Filing has consequences in both directions. Where a company is reclassified as a non-family business, the Dubai procedure records that a charter filed with the Dubai Business Registration and Licensing Corporation is then automatically cancelled, and that where the charter was registered with the Ministry of Economy, the Ministry will automatically cancel and remove it from its records.

This article is educational and is written with law firms. It describes general positions under the law in force and is not advice on any family's circumstances. A family should take its own legal advice. Nothing here indicates that the programme has verified or endorsed any structure, document or arrangement.