ARTICLES & UPDATES

Family businesses play a significant role in the economy, particularly in the Gulf Cooperation Council (GCC) countries. Despite their importance, however, they face numerous challenges and difficulties when majority power becomes dominant, especially where the majority may lack adequate knowledge of the company’s management and internal systems. In such cases, the individuals who were closely involved in building and operating the business may find themselves reduced to a minority position, after having previously managed all aspects of the company’s affairs.

Family businesses can face organizational and management challenges when they are required to operate under the general legal rules that govern companies, especially if they are listed on a stock exchange. Originally, the family bond serves as the foundation of the business, providing shared values, common goals, and cohesion that the family aims to maintain and develop. When legal frameworks impose formal management and governance requirements, it is important that these rules do not weaken or undermine the fundamental role of the family in the business.

The weakest point in family businesses is often linked to the company’s continuity and sustainability after the founder steps aside and is succeeded by children and grandchildren. As the number of partners increases, disputes emerge over authority and management, minority partners may be marginalized, succession planning may be neglected, and conflicts arise between personal interests, professional interests, and the interests of the company itself.

From a legal perspective, there is no distinction between family businesses and other types of companies. The relevant legal provisions apply equally to all companies in their various forms, as there are no specific legislative frameworks dedicated to regulating family businesses.

Abuse of majority power may be more common in family businesses, as partners belong to the same family and the dominance of senior family members may be socially accepted due to their relationship with the founder. However, there are situations in which minority partners cannot accept such dominance, particularly where it results in practices that harm minority interests. These practices may take multiple unlawful forms, including excluding minority partners from management and access to information, adopting inappropriate or unfair profit distribution decisions, charging personal expenses to the company for the benefit of certain partners, or entering into related-party transactions without transparency. Other forms of prejudice against minority interests include increasing the company’s capital in a manner that dilutes minority shareholdings, or liquidating or merging the company to serve the interests of a particular group.

In such cases, the law must intervene to prevent abuse of authority.

The Commercial Companies Law does not permit company management, regardless of the company’s legal form, to carry out acts that go beyond the scope of ordinary management without the approval of all partners or an explicit provision in the company’s articles of association. Managers are jointly liable toward the company, the partners, and third parties for any violations of these provisions. Every partner or shareholder, regardless of the value of their interest or shareholding, has the right to hold management accountable and to inspect the company’s books and accounts. Minority partners, acting collectively, may request the removal of a manager who has committed fraud, error, or mismanagement.

These principles also apply to joint-stock companies, where any shareholder, irrespective of the number of shares held, has the right to hold the board of directors and executive management accountable. Shareholders are entitled to attend general assembly meetings, engage in discussions, and question management regarding any shortcomings or deviations from the law. Any shareholder may also bring a liability claim individually.

Furthermore, any shareholder may file a lawsuit seeking the annulment of any decision issued by the board of directors or the general assembly if such decision is prejudicial to the rights of minority shareholders.

Therefore, it may be concluded that, although there is no specific legislation governing family businesses, the provisions of company law provide meaningful protection to minority partners. From a legal standpoint, there is no distinction between family businesses and other commercial companies in preventing the excesses and abuse of power by the majority.

This article was recently published in Arabic in Al-Jarida newspaper. You can view the original newspaper clipping here- https://www.aljarida.com/article/118792

Attorney – Abdulrazzaq Abdullah E-mail: azq@arazzaqlaw.com