Federal Law no. 2 of 2015 (the "2015 Law") is shortly due to replace the existing Federal Law no.8 of 1984 (the "1984 Law"), ending several years in the legislative process and even more years of speculation as to amendments to certain key characteristics of the 1984 Law. To find out all about it, Lawyer Monthly benefits from an exclusive article from Ken Dixon, a Partner at Galadari Advocates and Legal Consultants.

One of the most widely speculated amendments was that pertaining to the permitted percentage of foreign ownership in a limited liability company. Notwithstanding years of speculation and numerous articles promoting the benefits of increasing the foreign ownership percentage to beyond 49%, which was largely viewed as a key driver to stimulate direct foreign investment, remains unchanged, with nonUAE nationals still only entitled to hold a 49% interest in a limited liability company.

The 2015 Law does, however, introduce certain new provisions which could be viewed as being key drivers to stimulating commercial growth and activity. Under the 1984 Law a limited liability company was required to have at least two partners which automatically excluded a single person from incorporating an LLC and enjoying the limited liability benefits of such an entity. The 2015 Law has done away with this two party minimum and provides that "One natural or corporate person may incorporate and hold a Limited Liability Company." (Article 71). It is anticipated that this will encourage many smaller single person businesses to develop into more formal corporate structures and stimulate growth at the smaller end of the corporate spectrum.

Another significant change has occurred at the other end of the spectrum with a new limit for public offering of shares in Public Joint Stock Companies. The 1984 Law required that the founder members "must subscribe to a minimum of 20% and a maximum of 45% of the share capital of the company". This meant that in order to take their business to this new level the partners would have to divest themselves of at least 55% of the equity in their company, effectively giving up control of the business they had built. This has been seen as a deterrent to going public and hence explains the relatively small volume of this type of activity locally in recent years. Under the 2015 Law however, this 55% minimum has been reduced to only 30%. It is hoped that by making provision for the founding members to be able to retain up to a 70% equity interest in their company, this will encourage more business owners to strive towards taking their companies down this route and thereby stimulate growth and development.

Securing financing has always been something which SMEs in the region have found difficult, particularly in the absence of suitable security. Although the 2015 Law does not tackle this aspect directly, the new Article 79 may, indirectly, assist in this regard. Article 79 of the 2015 Law makes provision for a partner to be able to "pledge its share in the company to another partner or to a third party." This ability to pledge ones shares did not exist under the 1984 Law and may well therefore present an alternate means of providing security for the purposes of raising finance, which should in turn stimulate business growth.

There are several other features to the 2015 Law which should have the effect of stimulating development and growth, primarily by making the UAE Company Law more familiar and in line with the company law of many other western jurisdictions. These include the creation of a centralised Companies Registrar and the introduction of numerous provisions pertaining to transparency and corporate governance, all of which should give potential foreign investors a degree of comfort which may not have existed previously.

Undoubtedly had the restriction of requiring limited liability companies to have a minimum 51% UAE national ownership been done away with under the 2015 Law, this would have had the effect of attracting direct foreign investment and stimulate business in the region. Whether the provisions discussed above will have a similar effect will remain to be seen, but they certainly open the legislative doors to do so.

This article was first published in the April 2015 edition of Lawyer Monthly http://www.lawyer-monthly.com/

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