Apr 16 2012
|more articles from|
The draft UAE commercial companies law: Comparative changes
2012 commenced with lively discussion on the proposed UAE Federal Law on Commercial Companies. This new law has now been approved by the UAE Cabinet, and it is anticipated that its implementation will improve the business landscape in the UAE, making it easier to do business here and potentially boosting the economy. The new law, once implemented, is also tipped to help upgrade the UAE's status from a frontier market to an emerging market, however it is questionable whether it will bring about the level of change anticipated and needed by the market.
Having reviewed the new law (as currently drafted) in detail and comparing it with the existing Federal Law No.8 of 1984 concerning Commercial Companies, as amended (the CCL), we have observed many noteworthy changes and amendments. This article highlights some of the main changes in terms of how they will impact companies seeking to carry out or already carrying out business in the UAE.
CHANGES IN SHAREHOLDING
According to the CCL, a company must have at least two shareholders. Under the new law, a company can be incorporated by a sole shareholder holding all shares in the company. This will apply to Limited Liability Companies (LLCs) and Private Joint Stock Companies (PrJSCs).
The shareholder's liability will remain limited to the extent of their capital in the company as specified in its articles of incorporation.
Number of Shareholders in LLCs
The number of shareholders in an LLC under the CCL cannot exceed 50. Under the new law the maximum number will increase to 75 which should provide companies with greater opportunities to raise capital.
Capital and Number of Shareholders in a PrJSC
Currently, PrJSCs must have at least three shareholders and the capital of the company must be a minimum of AED2 million. The new law lowers the minimum number of shareholders to two (taking into consideration the new sole shareholder option highlighted above) and limits the maximum number of shareholders to 200 (this will not apply to companies already in existence when the new law is issued, the transfer of shares by inheritance and for legacy or court order). The minimum capital of a PrJSC will be raised to AED5 million under the new law.
Pledge of Shares
An interesting provision of the new law will be the framework for the pledge of shares in LLCs. It is likely to facilitate foreign investment in the UAE. The new law will allow a shareholder to pledge their shares in an LLC to another shareholder or to a third party in accordance with the articles of incorporation of the company. The pledge will be deemed valid against the company and third parties upon its registration in the Commercial Registry of the competent authority of each Emirate.
Estimation in Shares in Kind in Limited Liability Companies
The new law contains detailed rules for valuing a consideration for the payment of shares in kind in a LLC. Interestingly, the new law provides that such consideration may be assessed on its cost to the partners by one or more financial valuators approved by the competent authority. However, the partners may mutually agree on the value of the in-kind contribution to the capital of the LLC provided such value is approved by the competent authority. The partner making such contribution shall be liable to third parties for the assessment of its value set out in the Memorandum of Association.
This is possibly the most eagerly awaited and talked about change in the new law. Currently, foreign ownership in the UAE cannot exceed 49% of the share capital of a company (Nationals of other GCC member countries including Oman, Kuwait, Bahrain, Qatar, Saudi Arabia are not deemed foreigners for this purpose provided that the LLC is fully owned by GCC Nationals). Pursuant to the new law, the UAE Cabinet may, on proposals made by the Minister of Economy, co-ordinate with the competent authority in the relevant Emirate to determine the form of company, type of business activity or class of business that can be held in full by a foreign national. They can also decide on instances where the shareholding of a foreign partner can exceed 49% of the share capital of the company. These determinations are likely to be made by decree. Note that these changes will not apply to Joint Liability Companies or Simple Commandite Companies where all partners must be UAE Nationals.
THE SCOPE OF FREE ZONE COMPANIES
The New Law states that the UAE Cabinet can issue a decree outlining the conditions for registering companies operating in UAE Free Zones that wish to carry out their business activities outside the free zone, in mainland (onshore) UAE. These decrees will open up the jurisdiction for free zone companies wishing to also operate in the UAE outside of the Free Zones.
The new law will enforce stricter corporate governance standards and procedures on PrJSCs in accordance with international standards and practices. The Ministry of Economy will be issuing a decree setting out corporate governance requirements and a framework for PrJSCs consisting of more than 75 shareholders. Banks, finance companies, financial investment companies, exchanges and money brokerage companies are excluded. In addition to this provision, it is intended that the Chairman of the Emirates Securities and Commodities Authority (ESCA) will issue corporate governance requirements for PrJSCs and the board of the company.
The new law also requires companies to keep accounting records evidencing their true financial position as well as keeping their accounting books at their head office for a period of at least 5 years.
Companies Exempt from the new law
Unlike the CCL, the new law will not apply to the following:
- Companies excluded by Cabinet resolution
- Companies wholly owned by Federal or local authorities or any entities wholly owned by such companies
- Companies in which the Federal or local authority, or any establishment, authority, department or company controlled or held by any of the foregoing (directly or indirectly) holds at least a 25% shareholding and which operates in oil exploration, drilling, refining, manufacturing, marketing or operating in the energy sector in power generation, gas production, or water desalination and distribution.
CHANGES FOR PUBLIC JOINT STOCK COMPANIES
Much of the new law relates to Public Joint Stock Companies (PJSCs) and some of the most important changes affecting them are highlighted below.
Nationality of Directors of PJSCs
Article 100 of the CCL states that the majority of the Board of Directors of a PJSC must be UAE Nationals. Article 155 of the new law follows the same principle, but excludes companies authorised by the UAE Cabinet to be owned entirely by a foreigner or companies whose foreign shareholding exceeds 49%.
Share Capital of PJSCs (issued and authorised capital)
The share capital of a company under the CCL must be issued share capital, however under the new law PJSCs can have both issued and authorised capital but the amount of authorised capital cannot exceed twice that of the issued share capital. This rule is still subject to the terms and conditions of ESCA.
Sale of Pre-emption Rights in a PJSC
Under the new law, a shareholder will be able to sell his pre-emptive rights to another shareholder or to a third party for monetary consideration. ESCA will be issuing a resolution detailing the process for selling pre-emptive rights in PJSCs.
Strategic Partner Contribution
Under the new law a company can, through special resolution, increase its share capital by inviting a strategic partner to subscribe to new shares without triggering the pre-emptive rights of the other shareholders. ESCA will be issuing a resolution outlining the conditions of, and procedure for, the subscription of a strategic partner. The Board of Directors will have to present a study at the General Assembly of shareholders showing why the PJSC is interested in a strategic partner. A strategic partner is defined in the new law as "a partner whose contribution to the company provides technical, operational or marketing support to the company for the good of the company". This is an exciting change that will hopefully encourage high profile investors to inject funds into PJSCs in the UAE, further bolstering the UAEs economic position and attractiveness as a business hub for the Middle East.
Employee Incentive Schemes
Under the new law, PJSCs will be able to increase their capital by offering shares to employees as a benefit/incentive, also without the other shareholders being able to exercise their pre-emptive rights. The Board of Directors will have to present the details of the scheme to the General Assembly and members of the board will not be allowed to participate in the scheme. ESCA will likely issue a resolution regulating the procedures for PJSCs applying for these share incentive schemes for their employees.
Under the new law, a PJSC can also increase its capital through the capitalisation of its cash debit without triggering the pre-emptive rights of the other shareholders. Cash debits are debits payable to the Federal government, local government, UAE public authorities and committees, banks and financial institutions. The board will have to present a feasibility study on the necessity to capitalise on such cash debits to the General Assembly. It is anticipated that ESCA will likely regulate the procedure and the conditions of this form of capitalisation.
Founders Share Capital in a PJSC
According to Article 78 of the CCL, the founder of a PJSC must subscribe to no less than 20% but no more than 70% of the share capital of a PJSC. Under Article 121 of the new law, founders are obliged to subscribe to no less than 30% and no more than 70% of the issued capital of the company prior to proceeding to an initial public offering (IPO) for the remainder of the shares. Founders are not entitled to subscribe to shares offered to the public.
Registered Agents for Branch or Representative Offices of a foreign company
The appointment of a UAE National agent is a requirement under the CCL for foreign companies wanting to set up a branch or representative office in the UAE. Under the new law, the appointment of a UAE National agent is optional.
In line with the UAE's goal of becoming the business hub of the Middle East, the new law contains regulations relating to companies with a special structure such as holding companies. Currently, holding companies are not regulated under UAE Law and local licensing authorities are now starting to recognize holding companies by the classification of their permitted economic activities such as investment in enterprise and trust activities. Establishing governance and laws for holding companies in the UAE is an important requirement in this market especially given the complex structures that are common within large diversified organisations and family groups. These changes will help these organisations monitor their management and accounting processes better.
The new law contains provisions setting out the liability of the company and that of its directors. It contains clarifications relating to directors' liabilities such as the liability of the manager of an LLC:
- Article 88 explicitly states that the director of an LLC shall be personally liable to the company, partners and third parties for any fraudulent act that occurs as a result of their negligent or fraudulent management. The manager of an LLC will also be liable for any loss or expense incurred due to the improper use of their powers in contravention of any applicable laws, the articles of incorporation of the company, their employment contract or their gross errors.
- Article 90 further states that the manager shall not, without the consent of the general assembly, get involved in or undertake deals that compete with the company. They also cannot manage any other company that is in direct competition with the current company.
The new law will predominantly impact Public Joint Stock Companies and will introduce some good general changes that will assist in attracting more funds into these companies. Changes to the general framework of PJSCs will protect and clarify the rights of stakeholders, improve levels of transparency through the disclosure of financial statements, and improve the integrity of boards. It will also increase the level of flexibility associated with setting up a business in the UAE as well as improve corporate governance for listed companies. It is evident however that certain widely anticipated changes, such as relaxing or abolishing the 49% foreign ownership limit, are not being made, instead, power remains with the UAE cabinet for such matters to be decided on a case by case basis.
Mohammed El Ghul
Senior Associate, Habib Al Mulla & Company
Senior Counsel, Habib Al Mulla & Company
This material is intended for general information only and should not be considered as legal advice. For further information, please contact us firstname.lastname@example.org
The views expressed in this article do not necessarily constitute the views of Zawya.
© Copyright Zawya. All Rights Reserved.
People Who Read This Also Read
- NASA wants backyard astronomers to help track asteroids
- CORRECTED-Kimberly-Clark moves to ease Venezuelan toilet paper shortage
- CORRECTED-U.S. patent case climaxes with win for Canadian vibrator maker
- UPDATE 1-"Drunk" claims upset Ukraine parliament budget hearing
- Kimberly-Clark moves to ease Venezuelan toilet paper shortage
- There's More