Middle Eastern Family Business: Inheritance Laws and Family Divisions

Middle Eastern Family Business: Inheritance Laws and Family Divisions

Middle Eastern Family businesses are challenged by generational change, due to the combined effects of inheritance laws, companies laws, large families and rivalry amongst heirs, challenges which are usually recognized when it is too late. 

Internal threats to Middle Eastern Family business

  1. Many Middle Eastern family businesses have been remarkably successful and have become true financial and business powerhouses. Paradoxically, even the most successful families often have dangerous fault lines within, and they fail to recognise potential lethal threats from the inside before it is too late.
Fault Lines Within
  1. Dangers from within the family are subtle and these problems are often more difficult for the founder or other family members to perceive or acknowledge, let alone tackle in an effective manner. But even hairline cracks in the family can widen and invite disaster, particularly where the cracks are disagreements between siblings, the family’s bridge to the next generation.
  2. In 1967 fine corrosion cracking triggered a catastrophic collapse of the Silver Suspension Bridge across the Ohio River in West Virginia, under the twin stresses of low temperatures and high bridge loading. A total of 46 people in motor vehicles died when they fell into the river with the bridge. Likewise, in families, the twin stresses of leadership transition and business pressures can open up differences between siblings or cousins and can lead to the disintegration of the fabric of the family and the business.
The Middle Eastern Cultural Context
  1. Most Middle Eastern family businesses were started by one or two founders who retain ownership of the equity. In the wings awaits a fresh generation of owners, and the number of heirs in the wings is often large, because the culture in the Gulf region favours large families. It is one thing to build a successful business, it is quite another task to imbue every stakeholder with a culture promoting the cohesion and continuity of the family in nurturing and growing successful business enterprises over generations.
  2. Regardless of whether or not a particular sibling understands the family business or embraces the culture, the Middle Eastern inheritance laws guarantee that this sibling will receive an inheritance share commensurate with each other sibling of the same gender, and the Middle Eastern companies laws in the Gulf region guarantee that any heir inheriting shares will have one vote for one share inherited. This combined force of inheritance laws and companies laws means that for most families in business there is absolutely no guarantee that equity and the voting power will be vested in those heirs with the knowledge, ability, character and commitment to lead the family enterprise. Those heirs who do have the training and experience are commonly outnumbered and outvoted by other heirs without these qualities.
  3. The control of family business assets is a key which may unlock a vast reservoir of financial power, social prestige and an enviable lifestyle, so it is natural that there should be rivalry amongst heirs to lead the business. Add the element of sibling rivalry as an overlay and it can be seen that there is real potential for family business disagreements to escalate, particularly at the time when the founder ceases to play an active role.
  4. For these reasons, the inevitable transition associated with generational change and the inheritance process carries with it the potential to develop into an existential threat to the continuity of many Middle Eastern business enterprises. Even where the family business does not break apart, the paralysis of decision-making and the need for complete unanimity in the post-founder era may cause a gradual erosion of the business and asset base.
What Can Middle Eastern Families in Business Do?
  1. The first and the most important thing is to realise that in many cases the past history of the family and its enterprises may not be a reliable guide to what will happen in the future, so something must be done to secure the future.
  2. A family which has a desire to sustain and grow a business together must:

(a) develop a vision;

(b) generate a consensus to embrace the vision;

(c) formulate a plan to take the practical steps to ensure the vision continues (including a succession or stewardship plan); and

(d) implement that plan in an effective way with the best advice.

What Can Families’ Legal Advisers Do?

  1. There are clearly limitations as to what legal advisers can achieve in managing close familial relationships. However, good legal advisers can help, particularly where the atmosphere in the family remains positive. For example they can:

(a) suggest that the family needs to work together to develop the right succession plan and framework of arrangements to promote stewardship, continuity and an orderly transition when generational change occurs;

(b) make sure the right questions are asked and addressed even though the questions may be tough (e.g. should present or future in-laws have a role in the business?);

(c) encourage the creation of safety valves, because if a minority of family members becomes locked into a structure which others control they may feel they have no choice but to fight to break up the business, unless the minority is provided with a fair exit option.

Conclusion

    1. Family businesses are vital to the lifeblood of Middle Eastern economies and societies but there is a great need to educate families on the need to put in place the structures and governance platforms necessary for future continuity, harmony and growth in the business enterprise. The hidden economic and social costs of families in business which are dysfunctional are very high, measured in lost business revenues and missed growth opportunities. The family must put in place a leader or a leadership group which can act decisively to move the business forward. Well structured arrangements are needed to head off the ultimately destructive process of open conflict and litigation within families.
    2. The challenge for families is to apply the right guiding principles for good corporate governance to build a cohesive family and business dynamic for the good of future generations. Otherwise, the bridge to the next generation will crack and fail, and the family legacy will be lost.

Note: An extended version of this article was first published in “The Oath”, the Middle East Law Journal for Corporates in May 2014. https://www.linkedin.com/in/gary-watts/?originalSubdomain=au

Succession in Russia

Succession in Russia

Succession in Russia is possible by will and operation of law. The freedom of will is limited. To acquire the estate the heirs shall accept it. Succession in Russia is the only way to transfer property in case of death. The only way to change the order of succession established by law in Russia is to make a will. The freedom of will is limited by compulsory heirship rules and spouse’ part in the joint property. For more details please follow…

Order of Succession in Russia in Compliance with Domestic Law

Succession in Russia is the only way to transfer property in the case of death. Deceased’s estate (property, rights and obligations) shall pass to other persons by universal succession, i.e. in an unchanged, single form at the same time. It is an important fact that heirs have no right to waive part of inherited property. For example, it is impossible to accept deceased’s assets and to reject debts.

Rights and liabilities which are connected with the personality of the deceased shall not be included in the estate. In particular it will be the following rights:

  • the right to alimony,
  • right to damages for harm inflicted to the person’s life or health, and also
  • rights and liabilities prohibited for succession by law,

For example, rights arisen from the following agreements shall not be inherited:

  • gratuitous use agreements,
  • agency agreements,
  • contracts of commission agency.

The following personal incorporeal rights shall not be included in the estate:

  • right to the name,
  • right of authorship,
  • other personal non-property rights and intangible wealth.

Inheritance includes both properties situated in Russia and abroad. Whereby if testator’s last abode is situated abroad, only real property (immovable), situated in Russia, will be inherited by Russian law.

Succession in Russia may be provided by will and by operation of law. In the case of succession by operation of law all legal heirs, who are called upon to inherit in compliance with the priority, shall inherit in equal shares. The order of succession may be changed by composing a will which has a priority under succession by operation of law.

Inheritance by Will as the Way of Structuring of Succession in Russia

The will as the way of structuring of Succession in Russia shall be created personally and contain dispositions of only one person. It cannot be created through a representative and it cannot be created by two persons or more . As a general rule, the will shall be made in writing and attested by a notary. Failure to observe these rules causes the invalidity of the will.

The deceased can dispose of his/her property or a portion thereof by means of one or several wills . A will may contain dispositions relating to any property, in particular, a property that a testator might acquire after issuing a will .

The testator has the following rights:

  • to transfer property at his own discretion to any persons,
  • to define in any way the shares of the heirs in the inheritance,
  • to deprive of the inheritance several or all legal heirs, not explaining the reasons for such deprivation,
  • to include into the will other orders.

Nevertheless, irrespectively of the provisions of the will the following compulsory heirs excluded from the will automatically gain at least half of the share each of them is entitled to in the case of legal Succession in Russia :

  • minor or disabled children of the testator,
  • disabled spouse and parents,
  • disabled dependants of the testator.

Spouse’s Right to ½ Part of the Deceased Property

The property acquired by the spouses during their marriage shall be their joint property according to the Family Code of the Russian Federation . The shares of the spouses in their joint property are considered as equal, unless the alternative is provided by marriage contract. Therefore, in case the spouses do not agreed otherwise, the deceased’s spouse automatically gains half of jointly owned property. The second part of this common joined property shall be divided between all heirs by will or by operation of law.

Inheritance Acceptance as the Step of Succession in Russia

Inheritance acceptance is the important step of Succession in Russia. To acquire the inheritance the heirs shall accept it. There are two methods of inheritance acceptance :

  1. filing an application to the notary who maintain the inheritance case and
  2. making implicative actions.

The implicative actions will be made if the heir:

  • has commenced possession or administration of assets of the inheritance;
  • has taken measures for preserving assets of the estate, protecting it against third persons’ encroachments or claims;
  • has made expenses on his account towards maintenance of assets of the estate;
  • has paid the testator’s debts or received from third persons amounts of money payable to the testator.

The term for inheritance acceptance consists of 6 months after the date of the testator’s death. The heir may accept the assets after this term in two cases:

  1. reinitiating the term for inheritance acceptance by the court order
  2. without applying to the court if other hers have no objections.

The inheritance by minors has some special features:

  • assets to be transferred to the minors may be accepted by their legal representatives (for example by the parents alive),
  • in certain cases the disposal of the property owned by minors cannot be performed without preliminary consent of the guardianship agency. https://www.alrud.com