The Middle East is dominated by family businesses. Many of those businesses have been built up by entrepreneurs over the past 50 years. They are responsible, in large part, for having created much of the wealth of this region. Indeed, that journey is not over: it is estimated by Knight Frank that the number of UHNWI in the Middle East – many of whom run large family-owned businesses – will grow by 17% over the next four years*.
Clearly the world is going through a period of great uncertainty, but there are two facts which appear to be certain: first, everyone (including Middle East based businesses) will be affected by the current situation in one way or another; second, it will end. Uncertainty, whatever the cause, tends to focus minds on the need to plan for such eventualities in future. In the context of families, this means considering what needs to be done in order to protect and preserve the legacy of the family business and wealth. For those with structures already in place, these should be reviewed and updated where necessary. For many, who have no formal structure in place, structuring is likely to become a greater priority.
In this article, we take the opportunity to explore the potential benefits of structuring as well as sharing some insights drawn from recent and current client experience in the Middle East.
There are many reasons families may choose to use estate planning structures, like holding companies, trusts or foundations. Some of the most common reasons include:
The result of putting such structures in place is peace of mind and a level of legal certainty about what the future looks like.
In our experience, clients want solutions that work for them. In practice, this really boils down to protection combined with control and flexibility. The role of the client's trustees and lawyers is to design and implement the appropriate structure for each family. Off the shelf solutions are clearly not appropriate in most cases, but with the benefit of decades of experience, there are a number of key issues and typical questions that tend to arise in discussions with GCC based clients.
Although a generalisation, the "typical" GCC family will have significant regional exposure, perhaps having a family operating business located in the region, regional real estate as well as a basket of assets in offshore jurisdictions (bank accounts in Switzerland and UK real estate being common examples). The solutions adopted in respect of the different groups of assets needs to be tailored.
There is a prevalence of sizeable family-owned businesses in the Middle East, making these considerations especially important. Furthermore, these families are often large and extended, and having a formal structure would go some way to ensuring that each member understood the path that had been chosen, thereby avoiding inter-family conflicts.
Key to the region is its Islamic heritage, and it is important to work with partners who are well placed to help clients who wish to implement Sharia-compliant solutions. There is no one-size-fits-all Islamic structuring solution.
Finally, there is an understandable desire for the founders of these large family businesses to retain control over the underlying assets whilst simultaneously putting a legal structure in place to protect them now and in the future: working with third parties who understand such nuances and are positioned to assist in the implementation and administration of appropriate structures is paramount. Whilst there may be a traditional balance of power, it is likely owners may wish to reserve powers to control matters which represent a significant financial or reputational risk.
Financial: significant capital expenditure or borrowings.
Governance: appointment and removal of directors
Reputational: change in corporate brand, use of the family name, closure of elements of the business, redundancies.
The ownership and governance of the family business and other assets should be discussed and agreed upon in advance in order to try and minimise disruption and the potential for dispute. The family will need to decide on the principles to govern issues where the interests of the family and the interests of the business could conflict or overlap, but trustees and lawyers can help to guide these discussions as well as implement the structures where policies are enshrined.
This can be a daunting task at first. Alastair Glover, a private wealth partner at Trowers & Hamlins based in Dubai recommends taking a phased approach
"all too often we see families paralysed by the apparent enormity of the task at hand causing them to fall at the first hurdle. We advocate breaking the task down into more manageable chunks. For some, this will mean starting with the offshore assets and setting up a family trust (possibly via a private trust company) or foundation in a jurisdiction such as Jersey, which can act as a blueprint for dealing with assets in other jurisdictions. Others will prioritise the operating business. For example, we conduct family business health checks for our clients, which are targeted to identify potential weaknesses in their current structures and areas where they may wish to take immediate remedial action at both an operational and governance level. This can be a very useful way to start the structuring journey for many. However, whatever starting point is chosen, the key is to start!"
As the Dubai-based Regional Director for Fiduchi in the Middle East, Christopher Dungan has found that,
“the family clients and intermediaries we work with in the region prefer to work with like-minded companies. The relationship a family has with their trustee or corporate administrator is not transactional, it is for the long-term. Working, therefore, with independent owner-managed businesses who share similar values as the families with whom they partner makes a big difference. As a privately owned trust company, Fiduchi is flexible and in it for the long run: we know how to help families and businesses plan for succession, because we do it within our own business.”
Based on research conducted in November of last year by Hubbis, in conjunction with Jersey Finance, there is an estimated USD 1 trillion due to be passed down in the next decade from older Middle Eastern patriarchs and matriarchs to the younger generation.
Clients are often advised to set up trusts as part of their wealth planning arrangements but for some, an offshore trust may hold a certain mystique. The purpose of this article is to explain some of the basics in establishing a trust together with the potential benefits that may be available.
Working with independent owner-managed businesses who have the same vision as the families with whom they partner makes a big difference. As a privately owned trust company, Fiduchi is flexible and in it for the long run: we know how to help families and businesses plan for succession, because we do it within our own business. Additionally, our awareness and sensitivity to specific regional and cultural issues, as well as the nuances around inheritance and heirship implications for families in the Middle East, means we can help you with your family structure.