Sharjah Executive Council Issues Resolution No. 31 of 2024

New Sharjah’s Executive Council Resolution No. 31 of 2024

The government has made Executive Council Resolution No 31 of 2024 of October 1st this year for creating a comprehensive new legal system regulating, supervising and offering family businesses opportunities to exist and contribute positively towards being successful economic backbone within Emirate of Sharja. With a view of continuity, governance, and the resolution of disputes, guidelines on ownership and corporate structure including mechanisms of resolving conflicts will find their importance towards the success of family businesses with long term continuance. 

Economic Contribution of Family Business in Sharjah

Family-owned firms are part and parcel of the economic tapestry of Sharjah. In fact, family firms provide substantial inputs to Sharjah's GDP and employment. The family-owned firms have been an essential source of local economic strength for decades. Emirate has already come to realize that these businesses will drive innovation, job creation, and economic diversification. Therefore, the new framework in Resolution No. 31 seeks to ensure that the businesses continue to grow; they benefit from this structure that is related with long-term growth while confronting some challenges.

Support to continuity generation for family enterprises forms the prominent part of this resolution. As clear legal frameworks guide a business through fewer disturbances, business continues to operate with sustainability, while the processes become adaptable towards successive generations from the previous owner. Sharjah has thereby emphasized family enterprises and therefore become an indispensable regional center hub for family entrepreneurship.

Ownership and Governance Framework

Under the resolution, family businesses are mandated to formalize their operations through clear legal structures, such as the creation of Articles of Association (AoA). A unique provision is the mandatory inclusion of the term "Family Business" in the AoA, which serves as an identifier and signifies the business's commitment to maintaining ownership within the family. This terminology emphasizes the importance of family control, which is central to the resolution's goals.

The resolution also outlines several legal forms that family businesses can adopt, with the most common being the Private Joint Stock Company (PJSC) and the Limited Liability Company (LLC). These forms allow businesses to operate within well-defined legal frameworks, ensuring both transparency and accountability.

The resolution allows family businesses to issue shares that either provide voting rights or profit rights, allowing flexibility in structuring ownership. This is especially helpful to families that desire to retain management control over the business operations yet still allow more family members to share in some financial benefits. The resolution makes it possible for family businesses to balance the control of decision making and profit distribution in a manner that suits the family's needs.

Increased Shareholder Rights Flexibility

One of the key features of the new framework is the flexibility it offers in shareholder rights. Under the resolution, family businesses have the option to issue shares that allow holders to either:

1. Participate in company profits and have voting rights in the Company General Assembly.
2. Participate in profits without the ability to vote.

The structure of having both shares enables family members to take and retain some decision-making on essential business while other extended members could share on financial benefits associated with the running of the business. This form of ownership suits families that may own large business that not necessarily contribute to operational tasks but expect fruits from running business.

Transferring Rules as well as Buying Back Arrangement

Another important feature of the resolution is the share transfer provision. According to Article 5 of the resolution, shareholders are not allowed to transfer their shares to non-family members, and thus family control is maintained. If a non-family member acquires shares in contravention of this provision, the family business has the right to buy back those shares. The process is as follows:

1. Agreed Value

The family business may recover the shares at a price agreed upon by the parties involved.

2. Expert Valuation

If there is a disagreement over the price, an expert appointed by the relevant authority will assess the share's value.

3. Buy-back by the Family Business

If no family member purchases the shares, the business itself is required to buy them back.

This mechanism ensures that family ownership is preserved and prevents external parties from gaining control of a family business, thus protecting the family's long-term interests.

Dispute Resolution Mechanisms

Given the potential for conflict within a family business, the resolution incorporates provisions that may be necessary for resolving internal conflicts. Article 9 of the resolution makes provision for the creation of a council of shareholders or family members that can handle internal conflicts arising in the business. The council serves as an internal organ designed to reconcile and encourage cooperation with a view to preserving family harmony.

In cases where the council is unable to resolve the conflict or is not constituted, the dispute resolution brings in an alternative avenue, which is the Sharjah International Commercial Arbitration Centre, also known as TAHKEEM. Any dispute may be submitted to TAHKEEM-an arbitral body comprised of experts in commercial arbitration of disputes. This provision ensures that family businesses obtain a professional yet efficient means of dispute resolution so that business operations can continue unaffected from protracted battle in courts of law.

The Family Charter

The other essential component of the resolution is the creation of a Family Charter. The Family Charter can be considered a foundation document that describes the rules of family ownership, profit distribution, and decision-making. It can therefore be used to establish clear expectations among family members who are part of the business and to set a framework to solve disputes.

In case of conflict between the Family Charter and Articles of Association, AoA shall prevail. This ensures a hierarchy, where governance documents are uniform and give an enforceable structure.

By having such a charter, families can proactively address potential issues that may be reduced in their disputes and, thereby, bring stability to the business in the long term.

Endowment and Supervision

In addition to the above provisions, the resolution also addresses the possibility of family business properties being designated as endowments. According to Law No. 8 of 2018 concerning endowments in Sharjah, family businesses may choose to designate certain assets as endowments, with a supervisor appointed to manage these assets.

Article 7 of the resolution permits a supervisor, whose powers and duties are set by the Company General Assembly, to manage the endowments. The latter provides a framework through which the endowment assets can be dealt with responsibly and in an open manner. It helps prevent conflicts while further enhancing the financial solidity of family businesses.

Conclusion

Introducing Sharjah Executive Council Resolution No. 31 of 2024 would prove to be one of the key changes in regulating family businesses within the Emirate. The resolution took a holistic approach to ownership, governance, and dispute resolution for family businesses with a view towards a sound legal framework for effective and sustainable family business operation. The resolution will address the long-term sustainability of the family business because it facilitates across-generation business handovers, accepts flexible ownership structure, and is equipped with vigorous mechanisms for settlement of internal contentions. Many family businesses find a place of importance in the economic map of Sharjah and, by being able to enable their continuity, the resolution serves to further enable the economic soundness and progression of the Emirate.

The resolution thus provides the family businesses operating in Sharjah, or planning to establish themselves there, with the much-needed legal tools to stay ahead and strong within an ever-changing market. It makes way for the family businesses to thrive and become a major propeller of economic growth in the region through the clear guidelines and mechanisms that flow from it.

As Sharjah cements its position as an innovation and business development hub, the adoption of Executive Council Resolution No. 31 of 2024 by family businesses sets them on a firm foundation for long-term success and integration into the global economy.