The importance of wills to GCC businesses

In my line of business, I am often found quoting the words of American author and academic John M. Richardson, Jr.

Marked by innate simplicity, it is as simple to practice as it is to preach: “When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened.”

If you own or co-own a business or professional practice in the UAE, it is important that you plan for its future, and that of your family members, before someone has to sit back and sigh over what went wrong.

As a business owner, a significant portion of your wealth – and possibly your family’s main source of future income – will be tied up in your business. The success of your business succession planning is dependent upon this business being transferred smoothly, or sold to a third party for a fair price.

Either way, it takes considerable planning and preparation, and should be ranked high on a priority task list for all business owners.

Average global statistics estimate that less than 30 per cent of family owned businesses survive to the second generation, and less than 12 per cent to the third. The survival rate for the fourth generation is a meagre 3 per cent.

For expatriates living in the UAE, these figures may be ever more alarmingly lower. The Government of Dubai’s official website emphasises that “The UAE Courts will adhere to Sharia law in any situation where there is no will in place”. This means if you die without having planned your future – or that of your family – the local courts will examine your estate and distribute it according to Sharia law.

Personal assets including vehicles and bank accounts will be frozen, until liabilities such as credit card and business debts have been discharged. A wife who has children will qualify for only one eighth of the estate. Shared assets will be frozen until the issue of inheritance is determined by the local courts, and surviving family members are often left without access to money during this period.

On the business front, if you do not have a proper business succession plan or estate planning in place, you simply cannot be sure what will happen after your death: whether your family will be provided for, who will look after your business, and when and how your beneficiaries will stand to benefit from the investments you made in your business.

There are also many uncertainties regarding real estate inheritance issues under Sharia law, especially in the case of office, showroom, manufacturing or warehouse facilities that are owned or co-owned by an individual but used by the business. Unlike other jurisdictions, the UAE does not practice ‘right of survivorship’ (where property passes on automatically to a surviving joint owner upon death of the other), and the local courts will have a final say in the matter.

All successful businesses — whether sole proprietor firms, partnerships, joint ventures, limited liability companies or free zone corporations — should plan for the transfer, succession, and /or sale of the business in unexpected circumstances shrouding the owner or a partner.

In fact, there is no automatic transfer of business shares upon the death of a partner. In the event of a shareholder’s death, local probate laws are applied to a business, but the results may be unpleasant – shares do not pass automatically by survivorship, nor can another family member take over in lieu.

A common example, particularly relevant to the UAE, is the absence of any planning where there is a limited liability company (an ‘LLC’). Of course, an LLC will have a local Emirati sponsor. The majority of Emirati sponsors are individuals, but recently it has become common for the Emirati sponsor to be a company owned by one or more Emirati shareholders. With the former, it could well be the case that when the local Emirati sponsor dies, the shares in the LLC could transfer to members of his family who may not wish to have the same relationship as the original sponsor. In such cases, some thought has to be given to ensure that the continuity of the business is not prejudiced by the death of a sponsor. This is becoming increasingly common where businesses were established in the UAE many years ago; but the age of the sponsor should not be the deciding factor – anyone, young or old, can die at any time.

Planning your business succession is a process, not an event, and it is intuitive, interactive, and reflective of circumstances. The process will also vary based on the number and diversity of issues involved. Consequently, there is no single fit solution that will work for everyone; each case has to be studied and evaluated independently.

It is best to begin by addressing and answering pertinent questions yourself: Who will run the business after you? Will revenues decrease dramatically? Will all your loyal clients take their business elsewhere? Will your business survive your absence?

Planning the future of your business and ensuring seamless continuity and success may be a complex process, but there are options available such as the preparation of a bespoke DIFC Will to deal with your business shares, buy-sell agreement, offshore trusts, and foundations.

A good business succession plan will address the death, disability or retirement of a business owner, as well as the sale of a business owner’s interest. Further, a great plan will ensure that all the business owner’s objectives are accomplished – that the most effective business transfer is realised, and that funds will be available to provide maximum financial flexibility.

By preparing (for example) a DIFC Will, lawyers can weave in clauses that minimise the possibility of conflict among co-owners, partners, and heirs, thereby lowering the risk of litigation, and the costs and time involved in probate.

This is a welcome regime from the DIFC: The ‘DIFC Wills and Probate Registry’ provides certainty for non-Muslim expatriates to pass on their Dubai/RAK estate (including business shares, property, bank accounts, etc) in the event of death to their chosen beneficiaries. It also allows non-Muslims to prepare wills to cover the issue of guardianship. This landmark move finally provides peace of mind to expatriates that now have the freedom to distribute their estate – including business shares – as they wish.

In addition, some thought should be given to ensuring that there is a shareholders’ agreement in place. This is essentially a contract between the shareholders that governs their relationship and is separate to a company’s memorandum and articles. Provisions can be inserted into such agreements that deal with the shares of a shareholder who dies and the mechanism of selling them to the other shareholders/company or to the family of a deceased shareholder. The company could also hedge such an occurrence by having in place ‘key man insurance’ to protect the company.

For a partnership or limited liability partnership, the equivalent to a shareholders’ agreement is a partnership deed.

Without adequate planning and/or a will, your business may be negatively impacted or forced to close in a relatively short period of time. And it will not be because you did something wrong. It will simply be because you did nothing at all.

Nita Maru is managing partner, solicitor at TWS Legal Consultants in Dubai