The legal framework for sustainable family businesses in the Kingdom

Background

The new Saudi Companies Law issued through Cabinet Decision No 678/1443 is a landmark legislation that has sown the seeds for a sustainable family business ecosystem. The provisions regarding family businesses introduced by the Companies Law are in pursuance of the economic objectives underpinned in the country’s landmark Vision 2030.

Family Charter

Most importantly, the Companies Law has introduced an institutional legal cover to family businesses. The founders, partners and shareholders of family-owned enterprises can now conclude a “family charter” (or a family constitution) to manage, govern and regulate the family business.

A family charter can also set out the terms and conditions regarding the work policy, the family members’ employment, distribution of profits, the disposition of shares and the mechanism for settling disputes. Although the decision to adopt a family charter is discretionary, once adopted, it becomes a binding contractual document and can be made a part of the company’s memorandum of association. The parties are free to agree upon the terms and conditions of a family charter.

There are several far-reaching benefits of having a family charter. As a family evolves across generations, a family charter functions as a protective barrier against disputes and provides a framework for succession and inheritance. It can determine how rights and obligations would be passed on from one generation to the next. This is important, given that family businesses can disintegrate if the family members have not agreed upon succession and inheritance matters covering their local and foreign assets and investments. In other words, by adopting a robust family charter, a family can mitigate against the risk of “uncertainty” and by keeping an “eye towards the future” become a sustainable enterprise with added wealth and prosperity. 

Role of professional advisors

Since every family is different, a family charter should be crafted by lawyers and financial experts who can undertake a 360-degree overview of the family’s structure, its history and objectives, investments, and future plans for growth and development. Professional advisors will know how to “preserve” the agreed upon terms and conditions in the family charter by using the right contractual language.

While the overall purpose of the family charter must always be to preserve wealth and cohesiveness of the family enterprise, true sustainability lies in providing a framework to the family for it to multiply wealth in the future without falling into dispute. In other words, the job of good advisors is to prepare a “forward looking” family charter that is a “living and breathing document” that can be amended, upgraded or supplemented through additional contractual documents depending upon new business requirements or investment opportunities.

Prevention, they say, is better than cure. Just like when facing a health condition, a person prefers to get treated by a competent doctor, similarly, family businesses must engage the right set of legal experts for maximizing gains from the family business provisions introduced by the Companies Law. An ounce of prevention today can not only enable family businesses to streamline their contractual obligations and avoid disputes in the future, but also position them to maximize gains from future business and investment opportunities both in the Kingdom and abroad.

Implication of the new Law

The new Law’s benefits go beyond sustainability of family businesses. Multinational companies eying investing in the Kingdom will view the institutional legal cover given to family businesses as a welcome development that will encourage them to enter into joint ventures with sustainable family businesses. In other words, the new Law will directly facilitate foreign direct investment and will thus constitute a vital part in the implementation of the Kingdom’s Vision 2030.

The “family” as an institution lies at the heart of the evolution of the Kingdom of Saudi Arabia. It has been the driving force behind the Kingdom’s robust social, cultural and economic growth. It is, therefore, no surprise that family-owned businesses (or family businesses as they are commonly known) reportedly contribute 66% to the Kingdom’s private sector GDP.

The Centre

Over the years, several initiatives have been taken in the Kingdom to integrate family businesses in the national mainstream and to provide an ecosystem for their sustainable growth. To this effect, the National Centre for Family Business (the “Centre”) has continued to play a pivotal role.

The Centre, a non-profit entity, created in 2019, aims at: “establishing a comprehensive system that contributes to the sustainability of family businesses and their contribution to national development by providing services and effectively communicating with all stakeholders.” The Centre has undertaken several commendable initiatives such as organized webinars, conferences and workshops; entered into institutional collaborations’; and initiated discussions with ministries around national projects.