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Succession Planning for Businesses in the U.A.E.

Succession Planning for Businesses in the U.A.E.

Zawya

05 August 2014

By: Ludmila Yamalova, Managing Partner, HPL Yamalova & Plewka DMCC

Succession planning usually refers to a process of identifying and developing people and systems to fill key business leadership positions in a company as part of a major transition.  In the U.A.E., the notion of succession planning has as a special meaning and application.  This is due to the country’s current legal framework and its practical implications.

First of all, the events that could trigger succession planning in the U.A.E. are of two major categories.  One category refers to the change of corporate ownership in the form of share transfer.  The other category refers to the change of management, which in of itself is a term of art.

Second of all, succession planning in the U.A.E. is much more about understanding and putting in place the right systems, instead of identifying the right individuals, to allow for the change to happen.  This is because any change in the corporate structure necessitates, first and foremost, a whole series of administrative steps, consisting of documents and processes.  Until certain documents have been submitted and certain processes have been followed, no corporate change can take place.

Share Transfer

One of the triggering events for succession planning for a corporation in the U.A.E. is the change in ownership.  Change in ownership, in turn, happens in the form of a sale or transfer of shares.  Events that can trigger change in corporate ownership are several.  It could be a simple sale of interest by one or more of the company’s shareholders, for whatever reason.  It could also be triggered by death of one of the company’s owners.  Or it could be an event of company’s liquidation or bankruptcy.

Succession planning for such events in the U.A.E. could be fairly limited.  This is because, under the U.A.E. legal system, shareholders may have restricted ability to plan for future transition and change in ownership.

In particular, a limited liability company (LLC), which is set up outside of a free zone, will always have a majority shareholder (51%) who is a U.A.E. national.  Therefore, any change in ownership will always require his consent, as the majority owner.  Parties’ agreements providing otherwise (which are usually memorialized in side agreements) will be held invalid, should the majority partner challenge such agreement at a later point.  Free zone companies, who are not subject to such restrictions, have more flexibility in structuring their corporate undertakings to allow for a smoother and more predictable transition.

In the event of a change of ownership due to the death of a shareholder, parties’ ability to provide for succession planning is even more limited.  This is because in the event of death, the personal status law (otherwise known as inheritance law) comes into play.  In the U.A.E., which is a Muslim country, Sharia law will apply to all shareholders who are Muslim.  Disposition of their assets, including ownership of corporate interests, will be treated under Sharia law, which provides for different treatment than the companies law.  Parties’ agreements providing for the disposition of corporate interests under different principles will not be honored.  Ultimately, disposition of company shares in the name of a deceased shareholder will always be subject to the local court’s order.  This applies to both Muslim and non-Muslim shareholders.  The only difference is the choice of law applied in deciding how to dispose of the assets.

Change of Manager

The other triggering event for succession planning is change of the company’s general manager.  The change of the company’s general manager must be planned well in advance, with thorough understanding of the processes and documents required to affect such change and their timely implementation.  This, in turns, stems from two factors unique to the U.A.E. legal system.  One is the special role played by the company’s general manager.  The other one relates to the documents required to be submitted, especially when they are issued outside of the U.A.E.

The notion of the general manager in the U.A.E. is a term of art.  In particular, this is the person who is listed on the company’s trade license as the manager.  The powers that are held by such manager are vast and immediate.  The manager holds, among other things, signatory authority to the company’s bank accounts, power to hire and fire employees, sign company documents and overall bind the company in all business dealings.

In other words, in the eyes of the authorities, the person listed on the trade license is the official, if not sole, decision maker.  On the day to day basis, this person yields more power than even the shareholders themselves.  Furthermore, under the U.A.E. corporate law, it is almost impossible to limit those powers, at least in practice.

Furthermore, to change the general manager for a U.A.E. based company that is a branch of a foreign company requires a whole series of documents from the mother company, which must follow a certain process.  In particular, some of the required documents include shareholder/board resolution of the mother company authorizing the change, certificate of incumbency of that same mother company certifying its current ownership structure, power of attorney to the new manager, revocation of the power of attorney from the old manager and so on.  More importantly, all of these documents must notarize in the relevant country, then legally translated into Arabic, attested by the U.A.E. Embassy of the relevant country and further attested by the Ministry of Foreign affairs in the U.A.E.  This process can take weeks, if not months.

Conclusion

In conclusion, it is important to understand that succession planning for a U.A.E. based company is subject to many restrictions and limitations.  Therefore, it is essential first to properly learn and understand the country’s legal framework that applies to corporate structures.  Then, parties must be aware of what they can and cannot plan for and rely on terms of succession planning of their businesses and manage their expectations accordingly.  As such, all legal documents and understandings should be drafted with this in mind.  Throughout all of this, parties must always keep in mind the U.A.E.’s requirements for documentation and its legalization.  Any corporate changes, therefore, should be planned well in advance, with all of the required documentation prepared and lined up timely, prior to making any significant decisions or changes locally.