Family businesses form a vital part of the global economy. The 2023 EY and University of St Gallen Family Business Index reports that the largest 500 family enterprises generate US$8.02 trillion in revenue and employ 24.5 million people worldwide. In the UK, a joint report from Oxford Economics and the IFB Research Foundation indicates that in 2020, family businesses contributed £575 billion in gross value added contribution to UK GDP (over 40% of UK GDP) and employed 13.9 million people (approximately 50% of all private sector employment).
Family businesses are a unique type of business, with their own set of challenges. Issues around governance and ownership, succession planning and resolution of disputes are well-known to those advising family businesses. However, despite their obvious value to the UK economy and the nuances that arise, the UK takes a 'one-size fits all' approach to both family and non-family businesses, with the same set of governance rules applying to both.
However, not all jurisdictions take the same approach, with Malta and the UAE the frontrunners in taking a more progressive path. In Malta, the Family Business Act came into force on 1 January 2017 with the stated objectives of encouraging the regulation of family businesses, their governance and the transfer of the family business from one generation to the next.
In the UAE, 2022 saw the introduction of "Federal Decree Law No. 37 of 2022 Concerning Family Companies (Businesses)", again with clearly stated objectives:
- To set an inclusive and easy legal framework to regulate ownership and governance of family companies, and to facilitate their transfer among the generations;
- To support continuity of the family companies, and enhance the private sector's role in economic growth and community contribution;
- To provide the proper mechanisms for resolving disputes; and
- To enhance contribution of family companies to the State's economy and its competitiveness.
The legislation in both jurisdictions establishes a register of family companies within each respective country to which family businesses can voluntarily sign up. Even this relatively small step, setting out a clear definition of what a family business is, gives family businesses a collective identity from which they can develop further and lobby as a recognised (and unique) type of business to achieve their aims.
Beyond this, the legislation in each jurisdiction adopts a different focus, with the Maltese Family Business Act focussing on financial incentives which will assist family businesses, particularly in connection with the transfer of the business to future generations. The UAE Decree, on the other hand, focuses on the essential elements of governance of family businesses. In doing so, the Decree guards against one of the most commonly encountered issues within family businesses – a lack of written agreements setting out a clear understanding of how the business will be managed and later passed on to future generations – and in turn therefore, guards against future disputes.
Maltese Family Business Act
The Maltese legislation introduces financial benefits such as reduced stamp duty on immoveable property, exemptions of stamp duty on the transfer of shares (up to a capped value), and financial grants for education and training. In addition, the legislation requires positive consideration of lease renewals where the family business leases industrial government premises, and the objectives of the renewal are to ensure continuity of the family business between family members. More recently, the Family Business Grant Scheme (which was launched by Malta Enterprise on 1 June 2024) provides financing of up to €20,000 over any rolling three-year period for advisory and mediation services required by family businesses for facilitation and planning of succession.
UAE Decree
Whilst the Maltese legislation focuses on enabling seamless succession and continuity of family businesses, the UAE Decree centres around governance, management and operational issues, although it does also cater for succession. In certain respects, the Decree is prescriptive, whereas in others there is a degree of flexibility for companies to apply bespoke provisions within a limited framework. In still other respects, the Decree suggests issues which the family business may wish to consider providing for within their agreements, without setting out any minimum requirements or indeed any stipulation that it is included at all.
Even where such provisions are not prescriptive, there is real value to them in that they direct family businesses to consider and agree points that are often forgotten. This can also be seen in the implicit encouragement that there be a family charter to deal with ownership, shareholding and profit distribution, but also importantly to set out the objectives and values of the family. Committing these objectives and values to writing at a time when the family is on good terms can help the family to crystallise what is important to them and can be invaluable if later disputes arise. Often, it is lack of communication, and poor management of the next generation’s expectations that can lead to disharmony.
The Decree also provides that the Family Charter may specify the minimum educational qualifications and practical experience to be held to work in the family business. Setting such minimum requirements can be crucial in managing the expectations of the next generation. While you may want to encourage family members to join the family business, it should be a privilege and not an entitlement. Setting minimum requirements ensures the next generation understands the requirements and work needed to secure their place as part of the executive.
Importantly, the Decree caters for dispute resolution mechanisms, encouraging businesses to establish a board, made up either of family members or third parties, to resolve disputes. In the absence of such a board (and unless the parties to the dispute have agreed to refer the dispute to arbitration or litigation), disputes will be referred to a 'Family Company Disputes Resolution Committee' which will be established in each Emirate. Each Committee will be presided over by a judge, who will be assisted by two experts in the legal, financial and family company management field. The Committee's decisions may be appealed before the competent court in the relevant State.
The establishment of specialist committees to resolve disputes within family businesses is a particularly astute move. Such committees should have an in-depth appreciation of the nuances of family businesses and an insight into the unique approaches and innovative solutions that may be required in order to resolve disputes within family businesses.
In addition to directing minds to the key issues to be considered and agreed upfront, the Decree also expressly recognises the intrinsic differences between family and non-family businesses by permitting family business to depart from the law as it otherwise applies to non-family businesses in relation to voting rights and pre-emption rights. This is in direct contrast to the 'one-size fits all' approach that has been adopted in the UK.
Could the UK and family businesses learn anything from the UAE and Malta?
The approaches adopted by Malta and the UAE, although different in focus, are both to be applauded. They each make clear statements that the governments recognise the unique nature of family businesses and their value to the economy, and demonstrate a clear commitment to their continuity and sustainability. The UAE's approach in particular directly addresses one of the key issues that can often lead to the downfall of family businesses – the lack of a simple framework to pre-empt and provide for the controversial issues that can arise in the running of the business.
There is no indication that the Labour Government is intending to introduce anything similar to the UAE model in the foreseeable future and, in terms of financial support, the UK family business sector is still reeling from the removal of inheritance tax relief, as well as a reduction in business property relief (BPR). Long-term policy decisions are crucial for family businesses aiming to pass the business on to future generations. As Family Business UK has written, BPR "underpins the entire model of family ownership ensuring that…businesses do not need to be broken up or sold off to pay a large Inheritance Tax bill", and the changes to BPR announced in the Autumn Budget 2024 "place a material uncertainty over the future of family-owned enterprises".
With many ultra high net worth individuals moving their centre of business to other jurisdictions, it is critical that the Government puts in place the right policy frameworks that will support and nurture the existing family businesses that we have, and to attract others to the UK.
Even in the absence of such change in the UK, family businesses can ensure that the relevant issues have been considered and addressed in robust agreements at an early stage. In particular, family businesses would do well to heed the approach that the Decree expressly states should be applied in the event of ambiguity of any provision of the Memorandum of Association or the Family Charter. It says that "they shall be interpreted in accordance with the common intention of the family company's founders and partners, as well as the objectives and goals for which it is established, in the manner that helps to ensure its continuity, growth, good management and smooth transition, helps the family company to avoid disputes and preserves it from one generation to the next generation".
As a guiding principle to the governance and management of all family businesses in general, it is an approach that will serve family businesses well.