Some legal issues about Family Companies

Dr. AbdelGadir Warsama Ghalib

Some legal issues about Family Companies

 

Family companies exist in Bahrain and other Gulf Countries since long time and they took tremendous efforts to boost and develop trade and other related corporate issues. Those companies mostly started from zero balance, when established by older generations, but the founders were great, of exceptional determination and dedication that took the business to prominent future. Some of the family companies, in the region, are carefully doing remarkable work and good achievements from generation to generation. However, this legacy does not exist all through, in most cases, due to the fact that many family companies diminish from the second or third generation.

There are many legal and corporate issues that could result in making certain obstacles in the pathway of many companies particularly family companies. However, we could say that some of the obstacles may arise for cultural or social reasons associated to the way of life in the region. And, this could happen in every part of the globe, the Gulf is not an exception by all means.              Apart from above instance, we believe that many family companies are lacking corporate governance rules. There is no clear segregation between the owners of the business and the business itself. They are all the same in one unit; the natural entity is not severed from the juristic entity. This could be one of the major setbacks facing family companies and leading to their diminishment. Corporate governance rules are essential for any corporate work activity otherwise the process will be greatly damaged and the whole system will reach a non-operating stage.

Founders of family companies are required to establish and put in action a clear-cut corporate governance rules that are to be closely observed and monitored by all family members involved in the affairs of the company. The main concept emerging from application of the corporate rules relates to clear demarcation between the affairs of the company from one end and the affairs of the family from other end. No mixture or blending at all between the two affairs and each family member must understand and adhere to this concept. A built-in operational system within the family is required. This non-mixture includes, among other things, the financial matters and related administrative affairs while marinating the juristic entity process. The company budget must always be different from wallet budget and vice versa … etc. Also, family companies must have clear strategy, proper planning, standard accounting practices, different managerial levels including Board of Directors and executive body. The role of each must be clear and in order, however, they must support each other as observed in check-and-balance concept.

The head(s) of the company must excel in giving good examples to younger generations and must plant family ego, values and traditions looking for good future harvest or, otherwise, deep roots in the tree of the family to face strong winds for survival. Nowadays, there is a legal requirement of injecting new ideas and brains by appointing  good reliable independent outsiders in the Boards \ executives to play an independent active role in the affairs of the company, future plans and all other affairs for prosperous future .

Very clear succession plans in family companies are a must and should be carefully arranged for otherwise setbacks could happen and could lead to the end of the life of the company in very short span. Succession policy is not that difficult affair; however, it could cause a real headache and unnecessary havoc for the whole process and future prospects. Succession strategy in family companies will ultimately lead to trustful continuity among present and future generations. To achieve this goal, things must be put in action.

Family companies could be very strong or, in the other extreme, could be very fragile. In both cases, special intensive care is needed to go through for existence. Following legal corporate methods and solid corporate governance rules will yield in healthy and long-life family companies that will serve all family members and the community wherein they are existing. Thus both ends will benefit….

Dr. AbdelGadir Warsama Ghalib

Legal expert --- Bahrain

Email:awghalib@hotmail.com