UAE laws: the Legal ramifications for small business owners
Mita Srinivasan
10x Industry

UAE laws: the Legal ramifications for small business owners

While significant changes in the UAE laws were announced recently, no official text of the changes accompanied the announcement (nor available at the time of this posting). While lawyers still await clarification and the official text changes to the laws, Michael Kortbawi, Partner at BSA Ahmad Bin Hezeem & Associates responded to a few questions around how some of these key changes would affect the owners and shareholders of the SMEs in the region.

How will this new change affect boards and shareholders as well as owners of FZ, FZE and LLC companies? What if any changes would you advocate these shareholders make around the proposed amendments to inheritance laws in terms of succession planning?

Michael Kortbawi: In terms of inheritance and succession planning, we expect that where there is no valid will, or there are aspects which the will does not cover, the estate will be divided as per the law of the deceased’s country of citizenship. Previously, UAE or Sharia law would apply in some cases, which expats did not usually favour.

In a business context, a separate legal entity is generally not dissolved upon a shareholder’s death. A shareholders’ agreement or a provision in the memorandum of association (MOA) usually provides for how shares owned may be transferred upon death of a shareholder. In the absence of such provisions, the shares held by the deceased would pass to the heirs, as per the new legal announcements of the deceased’s country of citizenship.

For entities such as sole establishments, which do not have a separate legal identity, the death of the owner/partner generally results in the entity being deemed as dissolved.

Our advice is that a comprehensive will is the best tool to enable the precise distribution of assets, and we recommend that individuals prepare adequate wills to carry out their wishes. Even with the law of one’s country of citizenship applying, the intestacy rules often will not align with how one wishes their estate to be distributed upon their death. Business owners have the additional task of paying close attention to clauses in shareholders’ agreements and corporate documents laying out what happens to their shares upon their death.

How would the new changes proposed under the divorce laws affect businesses and their owners?

MK: Prior to the announced changes, if a couple were married in a foreign country but got divorced in the UAE, either Sharia law or the law of the home country applied (as per their choice), and in cases of differing nationalities, the law of the husband’s nationality would apply. Generally, if a couple divorced in the UAE, assets including shares held in joint names would be divided according to the percentage of each party’s contribution. Assets in one’s own name, or bought alone, would remain the property of that party.

Following the announced changes, we expect that even if the divorce occurs in the UAE, it will proceed as per the laws of the country where the marriage took place, reducing the application of UAE or Sharia law. How this will affect shareholders will depend on where the individual got married. If ultimately the shares are required to be sold, then the shareholders’ agreements and/or the MOA would become relevant, for example, to determine whether other shareholders have pre-emption rights.

In the event of a divorce, it would be advisable to agree on the entitlements of each party. This helps avoid ambiguity and uncertainty for both parties on how a court would decide to partition property based on the law of a foreign country.

How soon would these new changes come into effect and what would your advice be to these owners?

MK: Although no official text of the changes has been published at the time of this interview, the changes are expected to be put into practice with immediate effect. The changes are expected to apply generally, and as such, should not have any impact on business owners specifically by virtue of their position as owners.

Our advice to business owners would be, whether in separation or in succession planning, that the relevant documents be clear and provide of the event in question. In succession planning, business owners should not only address the matter in their will, but also ensure that the corporate documents address the same. Similarly, in a divorce, the parties must endeavour to agree on a division of assets including shares.

One of the changes to Civil Law is that one partner in a business may sell it even if others refuse. How should shareholders and partners protect themselves?

MK: As per the expected changes to the UAE civil law, following an application to and permission by the court, one partner in a business venture may force the sale of the entire venture in some cases. The sale price would be divided among the partners pro-rata. Here too, the details such as the conditions on which application may be made and permission granted are expected to become clearer once the official text of the changes is available.