A Regulatory Update: UAE Federal Law No. 2 2015 on Commercial Companies (the “New CCL”)
The United Arab Emirates (the “UAE”) introduced on 1 July 2015, after years of speculation regarding an overhaul of the commercial companies law, UAE Federal Law No. 2 of 2015 on Commercial Companies (the “New CCL”), which substitutes in its entirety the previous Commercial Companies Law (UAE Federal Law No. 8 of 1984 on Commercial Companies, as amended) (the “Previous CCL”).
The New CCL is part of a set of new business laws in the UAE aimed at developing the UAE economy and bringing its laws more in line with the world’s leading economies, in particular by raising levels of good corporate governance, protection of shareholders and promotion of social responsibility of companies. It marks an important step in the maturity of the UAE’s legislative framework and a strong intention from the UAE to encourage foreign investment.
Notable features of the New CCL include the recognition of new concepts, such as sole-shareholder companies, holding companies, procedures for pledging shares and a number of improvements with regard to corporate governance, such as expert valuation of shares in kind (i.e. non-cash), authorized capital, companies’ registrar, corporate social responsibility, more accounting requirements and the requirement to rotate auditors.
UAE companies are required to amend their existing constitutional documents (i.e. Memorandum and Articles of Association (“Corporate Documents”)) to ensure compliance with the new provisions of the law.
This publication aims to comment on the principle changes which will affect all types of companies operating in the UAE.
EXEMPTED COMPANIES FROM THE APPLICATION OF THE NEW CCL
Excluded companies under Article 4 of the New CCL
The New CCL, like the Previous CCL, sets out a list of instances where companies may be exempt from its application. These include the following:
- Companies excluded by Federal Cabinet resolution;
- Companies held in full by Federal or Local Government and any other companies held in full by such companies if a special provision to that effect is contained in the company’s Corporate Documents; and
- Companies operating in certain oil, gas or power sectors in which the Federal or Local Government, directly or indirectly, holds twenty five percent (25%) if a special provision to that effect is contained in the company’s Corporate Documents.
Under the Previous CCL, excluded companies were only by resolution of the Federal Cabinet or companies operating in certain oil, gas or power sectors.
In the light of the above, it appears that the New CCL has expanded the list of instances where a company can be exempt from its application.
Exemptions applicable to free zone companies
The New CCL has retained the language in the previous CCL which provides that free zone companies are exempted from its application. However, if the laws of the free zone permit certain free zone companies to operate outside the relevant free zone (i.e. onshore), then the New CCL shall be applicable to such free zone companies.
Allowing free zone companies to operate onshore will provide greater business flexibility, mobility and, therefore, it is logical for such companies to comply with the provisions of the New CCL.
Details of how this will be applied in practice remain to be developed by the Federal Cabinet which is to issue a resolution to determine the conditions and requirements to register free zone companies to operate outside of the relevant free zone.
FOREIGN OWNERSHIP RESTRICTION
From an international investment point of view, somewhat disappointingly, the New CCL does not diverge from the previous CCL with regard to the company foreign ownership restriction in the UAE. The new CCL retains the same approach, which requires that any company established in the UAE shall have at least fifty one percent (51%) of share capital owned by UAE nationals or one hundred percent (100%) of share capital owned by Gulf Cooperation Council (“GCC”) nationals.
Any transfer of the title of any shares that may affect the discussed percentage shall be deemed as void. Moreover, the New CCL is more restrictive, as it grants the Cabinet of Minister the right to limit certain sectors to UAE nationals only.
However, a new Foreign Direct Investment Law (the “New FDI Law”) is under discussion amongst legislators which would potentially allow majority (non GCC) foreign ownership of UAE companies in certain sectors. Specific provisions and timeline of this proposed law are still to be released.
LIMITED LIABILITY COMPANIES (“LLCs”)
This section comments on the key provisions of the New CCL in relation to LLCs.
The maximum limit of shareholders remains at fifty, however, the New CCL permits a UAE single natural or corporate person to incorporate “single shareholder” LLCs. Under the Previous CCL, a minimum of two shareholders was required to establish LLCs.
With regard to the foreign ownership restriction, this amendment will mainly benefit UAE nationals wishing to set up sole proprietorships while enjoying limited liability status.
Another noteworthy change is that the New CCL expressly allows a shareholder to pledge its shares to another partner or a third party. Pledging shares means that the shareholder will offer its shares to a lender as collateral for a loan. Though the shares will be pledged to the lender, it is still owned by the shareholder unless he defaults on the loan.
Such pledge shall be made in accordance with the company’s Corporate Documents, be notarized and be registered in the commercial registrar of the relevant Department of Economic Development (the “DED”). This is a welcome development as it means that LLCs can now be more effectively used in financing structures, have greater access to debt finance and therefore be a more attractive investment opportunity for foreign investors.
However, it remains unclear how this new provision will be interpreted in practice.
The statutory pre-emption rights remain under the New CCL, which means a privilege extended to selected shareholders of the LLC that will give them the right to purchase additional shares in the LLC before the general public has the opportunity in the event of a seasoned offering.
However, the New CCL provides that in the event of disagreement on the price between the shareholders, the pre-emption price will be determined by one or more technical/financial experts (nominated by the competent authority on demand by the applicant for pre-emption).
The pre-emptions process is sub-optimal from a shareholder’s point of view as it may require that the shareholder sell its shares to another shareholder at a pre-emption price which may not necessarily be the same as the price offered by a third party purchaser (non-shareholder).
Governance and managers
The management of LLCs can be undertaken by one or more managers as determined by the partners in the Corporate Documents. One of the notable features of the New CCL is the removal of the requirement for a maximum of five managers, which is a positive development, as it allows for greater business flexibility and networking, and enables talented external advisers to sit on the board of managers (particularly helpful to regional family businesses with a large group of companies).
Non-compete by managers
The New CCL provides that an existing manager of LLCs may not, without the consent of the company, undertake the management of a competitor or a company with objects similar to his current employer. Managers who fail to comply with this non-compete provision will be dismissed and required to compensate the company.
This new provision is consistent with the reinforced duty of managers which is to act for the benefit of the company at all time.
However, the New CCL does not define what a “competitor” is and therefore this provision is subject to interpretation.
Quorum and adjourned meetings
The quorum for general assemblies has been raised from shareholders representing fifty percent (50%) to seventy-five percent (75%) of the share capital.
Given the continuing foreign ownership restriction which states that any company established in the UAE shall have at least fifty one percent (51%) of share capital owned by UAE nationals, this increase from fifty percent (50%) to seventy-five percent (75%) in order to meet the quorum for general assemblies will provide more protection to foreign investors.
Application of the provisions applicable to joint stock companies (“JSCs”)
The New CCL states that the provisions relating to joint stock companies are applicable to LLCs, unless otherwise specified under the New CCL. There is a significant difference in the structure of these two (2) types of entity, therefore it remains ambiguous how this provision will apply in practice.
Valuation of shares for non-cash consideration
In the light of the New CCL, valuation of shares can be assessed in kind either by:
- Agreement with all the shareholders, and subject to the approval of the DED; or
- By an independent financial advisor approved by DED.
Previously, shareholders could agree to a valuation of shares in kind, and such valuation was prescribed in the company’s Corporate Documents.
Under the New CCL, it has become more onerous for the shareholders to agree to a valuation of their shares in kind (i.e. non-cash consideration) as such valuation has to be approved by the DED.
Moreover, the New CCL does allow professional financial advisers to assist with such valuation. It will add certainty to the valuation process, although advisers should be mindful not to act negligently as a result they could be banned by the DED from future mandates.
PRIVATE JOINT STOCK COMPANIES (“Private JSCs”) AND PUBLIC JOINT STOCK COMPANIES (“Public JSCs”)
This section compares and contrasts the principal provisions of the New CCL in relation to Private JSCs and Public JSCs with the regime in the Previous CCL.
There are two forms of JSCs in the UAE, private and public ones. Both are capital companies aim to be incorporated by shareholders to participate in the capital of the company, with the personal relationship between the members being of less importance.
Share capital (general)
Key changes include:
- The minimum free float requirement in an IPO, which is the portion of company’s share that can be publicly traded, has been reduced from fifty-five percent (55%) to only thirty percent (30%) of a Public JSCs’ share capital. Furthermore, the New CCL also stipulates that the Securities & Commodities Authority (the “SCA”) may issue resolutions in order to regulate underwriting and/or book-building activities;
- Minimum share capital of a Public JSC has been increased from ten million Dirhams (AED 10,000,000.00) to thirty million Dirhams (AED 30,000,000.00), and minimum share capital of a Private JSC has been increased from two million Dirhams (AED 2,000,000.00) to five million Dirhams (AED 5,000,000.00);
- Public JSC’s share capital may not exceed twice the issued share capital;
- The issuance of different classes of shares is expressly prohibited by the New CCL, as an exception, a Federal Cabinet’s resolution prescribing the other classes of shares that may be issued, conditions of their issuance, rights and obligation; and
- Neither JSCs nor their subsidiaries may provide financial assistance to any person to subscribe in or buy shares, bonds and sukuk( loans, gifts, donations, company’s assets as security or provision of security/guarantee of the obligations of another person). This may have several implications on the lending business of the issuing bank. Moreover, the New CCL does not include “whitewash” procedure, which is financial assistance given by the company for the acquisition of its own shares or those of its holding company. “Whitewash” procedure requires a directors’ statutory declaration of solvency, an auditors’ report and a special resolution of the company. Under the New CCL, there is no “whitewash” procedure, therefore it allows financial assistance to be approved by shareholders in certain circumstances. As a result, it will limit the options available to purchasers when looking to finance their acquisition of shares.
The intention of these various changes (some are more restrictive and some are more relaxed) is to encourage interest in companies with growing perspectives through UAE capital market fund raising, however at the same time provide more comfort and transparency to potential investors.
Protection of minority shareholders
New measures under the New CCL aim to protect minority shareholders, including following:
- Subject to the consent of board of directors/managers and general assembly of the company, a Public JSC may not undertake transactions, with related parties, of a value in excess of five percent (5%) of the share capital of such company;
- Shareholders with five percent (5%) or more of a Public JSC may apply to the SCA and/or a competent court (if the said Authority denies the application or fails to respond within thirty (30) business days) claiming that they have been prejudiced by the affairs of the company, potential affairs or the failure to run the affairs; and
- Voiding (ab initio) any resolutions passed for, or against, a certain class of shareholders, or to bring a special benefit to the related party, without consideration of the interests of the Public JSC as a whole.
Protection of minority shareholders has been a priority for companies wishing to promote good corporate governance and corporate social responsibilities in order to regain the confidence of small investors. By introducing these new measures, the New CCL brings UAE corporate practice in line with international standards.
All Public JSCs shall have one or more auditors nominated by the board of directors/managers and approved by the general assembly. The auditors are appointed for one (1) renewable year, however such term does not exceed three (3) successive years. The previous CCL did not provide any requirements to rotate the auditors every three (3) years. Therefore, Public JSCs should be mindful not to breach this requirement.
Corporate governance regime
For Private JSCs with more than seventy-five shareholders, the Ministry of Economy shall issue decisions which set general framework regulating corporate governance. No such obligation was imposed on Private JSCs under the previous CCL.
For Public JSCs, the SCA shall issue the relevant governance decisions. No such obligation was imposed on Public JSCs under the previous CCL.
The board of directors/managers of the company shall be responsible for compliance with the applicable corporate governance framework, and failure to do so may attract a statutory penalty.
OTHER NEW CONCEPTS
Under the New CCL, LLCs and JSCs are allowed to be incorporated as a holding company which is a company that establishes or controls subsidiaries. There are restrictions on the activities of a holding company such as business activities shall be conducted solely through their subsidiaries. The objectives of a holding company are limited to holding shares or stock in companies, extending finance and acquiring assets and intellectual property rights.
The concept of holding companies is a common practice in many other jurisdictions for large corporate groups to achieve tax (in anticipation of future taxes in the UAE) and/or other corporate benefits in their corporate structure. By recognizing the concept of holding company for LLCs and JSCs under the New CCL, the UAE becomes more attractive, as a jurisdiction, for large corporate groups when they are considering a presence in the UAE.
The New CCL introduces the concept of a companies’ registrar (the “Companies’ Registrar”), which is required to maintain a trade name register (to avoid double registration), hold company records and enable the public to inspect the relevant company records.
The Ministry of Economy, in coordination with the competent authority, shall issue regulation setting out the activities and functions of this role.
In theory, the Companies’ Registrar should lend more coordination to the formation and dissolution of companies in UAE. Furthermore, it should provide more transparency (e.g. if shares are pledged or not) and a better access to corporate records by registering the information that companies are legally required to supply.
Managing director’s duties
In order to bring managing director’s duties closer to international standards, the New CCL provides that role of the managing director is to manage the company and they must preserve the rights and works of the company with the care of diligent person.
Additionally, any provision in the company’s memorandum and articles of association exempting any managing director from personal liability is voidable.
The New CCL aims to ensure more accountability and transparency for companies than the previous CCL. Therefore, the companies are required to keep accounting records for a minimum period of five (5) years. In addition, international accounting standards shall be applied by companies in order to give, at any time, a clear and accurate view of the profit and loss of the relevant companies.
COMPLIANCE WITH NEW CCL
The New CCL has been issued recently and therefore, its application and interpretation will be an on-going process at the present time and further regulations implementing the New CCL will be issued. It is important that all UAE companies as set out above carefully review the text of the New CCL and seek legal advice before proceeding with any activity or act that has been re-regulated by the CCL. UAE companies shall be mindful to adjust their positions (amending their constitutional documents, such as memorandum and articles of association) according to the new provisions of the New CCL by no later than 30 June 2016. Any company that fails to do so shall be mindful that it risks penalties between ten thousand Dirhams (AED 10,000.00) and one hundred thousand Dirhams (AED 100,000.00) and/or dissolution of the company.
The New CCL has introduced a number of other changes, however, this publication aims to provide a brief overview of the principle provisions rather than an exhaustive list of all the changes. Whilst the New CCL represents the first major overhaul of commercial companies law in the UAE since 1984, certain aspects remain ambiguous, and we await further guidance and clarifications from the relevant authorities in due course.
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