United Arab Emirates: Ministry Of Economy Clarifies The Application Of The UAE Commercial Companies Law To LLCs

Key PJSC provisions applied to LLCs

  • Directors' liability
  • Audited accounts
  • Accounts filing
  • Auditor provisions
  • Right to call a general meeting

Key PJSC provisions not applied to LLCs

  • Financial assistance
  • Board formation and composition
  • Director remuneration
  • Related party transactions
  • Restrictions on powers of the directors

Additional rules created by the Ministry specifically for LLCs

No extension to 30 June 2016 deadline

Since the new UAE Commercial Companies Law came into effect on 1 July 2015, there has been much market commentary on the application of the Law to Limited Liability Companies (LLCs). 

In a welcome move by the UAE government, the Ministry of Economy has clarified which provisions relating to Public Joint Stock Companies (PJSCs) are carried over to LLCs by virtue of Article 104 of the Law.

Many provisions have been taken out of the scope of LLCs, such as the prohibition on financial assistance. However, more importantly, the Ministry has specifically applied some PJSC provisions and added some new requirements.  It is important that LLC managers take action to comply with these in the future.

Ministerial Resolution

Ministerial Resolution No. 272 of 2016 (the Resolution) was published in the April edition of the Official Gazette, and came into force the day after publication on 29 April 2016.

Article 104 and the market debate

Article 104 of the Law states that the provisions which apply to PJSCs apply to LLCs on all issues not specifically provided for in the Law.

In the absence of guidance, it was difficult to be certain which provisions were intended to carry over to LLCs.  Particular concerns were voiced over the prohibition on financial assistance, loans to directors and the provisions on unfair prejudice.  Whilst not specifically referring to Article 104 of the Law, the Resolution sets out a list of the PJSC provisions which apply to LLCs and those which do not.

Key PJSC provisions which do not apply to LLCs

The Ministry has taken the following Articles out of the scope of Article 104. Therefore, these provisions only apply to PJSCs and private joint stock companies.

  • Financial assistance (Article 222) – it is made clear that it is not prohibited for financial assistance (for example in the form of a loan or the offer of financial security) to be given in relation to the acquisition of the shares in an LLC.  This exclusion will be well received by banks and financial institutions.  The concern was that such a prohibition (without the ability to "whitewash" its grant) would have had a disproportionate effect on the local acquisition finance market.  The Resolution does not specifically refer to the giving of financial assistance by an LLC in respect of the acquisition of a parent PJSC's shares (so called "upstream financial assistance"), but it seems clearer now that this is intended to be prohibited.  See our earlier briefing on financial assistance click here.
  • Formation and constitution of the board of directors – the Resolution takes many of the provisions relating to the board out of the scope of an LLC's management.  For example, the Ministry has highlighted that there is no need to elect LLC managers through a secret ballot and that the nationality restrictions do not apply to them.  These provisions did not fit well with the general nature of an LLC.  However, the clarification removes any residual doubt.  Also, the cap on the remuneration of directors under Article 169 does not apply to LLC managers.
  • Related party transactions (Article 152) – the Resolution removes any debate that the related party provisions apply to an LLC.  These provisions (i) prohibit a director and other related parties from dealing in securities and using inside information, and (ii) require shareholder consent for transactions with related parties with a value of more than 5% of the capital of the company. The Resolution does not specifically address whether the part of Article 152 which requires annual shareholder consent for a director to be involved in a competing business applies. However, involvement in competing businesses for LLC managers is dealt with specifically in Article 86 of the Law, which also provides for the consent of the general assembly (although as a "one off" permission).
  • Powers of the board of directors (Article 154) – there was some concern amongst law firms that this Article, which sets out certain types of matters for which special consent is required, applied to LLCs. This would have meant, for example, that the authority to agree to arbitration, or to enter into a loan with a duration of more than three years, had to be expressly permitted in a LLC's memorandum of association (MOA), or shareholder consent obtained.  This was at odds with the understanding prior to the Law, under which the manager named on the trade licence was believed to have these inherent powers.  The Ministry has now made clear that Article 154 does not apply.  Therefore, the LLC manager has full power to manage, unless otherwise restricted in the MOA or by special agreement.

Key PJSC provisions which do apply to LLCs

There are a few important provisions which are now considered to apply to LLCs.  Managers of LLCs are well advised to take note of these provisions and ensure that they are complied with.  At a minimum, failure to comply with the Law may attract a fine of at least AED10,000.  However, there may be other consequences, depending on the breach.

  • Suspension of a shareholder resolution by the general assembly (Article 191) – this Article allows shareholders who hold at least 5% of the capital of the company to request that the DED suspends the application of any shareholder resolution (within three working days of it being passed), where that resolution (i) is contrary to the interests of the shareholders, or (ii) favours any particular class of shareholders, or (iii) gives a special benefit to the directors or others.  The DED may agree to the suspension if the grounds for the request are serious and valid.  This suspension allows five days for any of the parties to apply to the court for the shareholder resolution to be annulled.  If such timeframe is not met, the suspension lapses.  In practice, clearly documented board and shareholder resolutions (together with the commercial rationale for decisions) will be important to defend resolutions.
  • Audited accounts - under Article 245, an LLC must produce audited accounts (audited in accordance with International Accounting Standards as required under Article 27 of the Law).  In addition, due to the application of Article 236(2) to LLCs, there is a requirement that such audited accounts are filed with the local DED within seven days of the annual general meeting approving those accounts. 
  • Other auditor provisions – most of the provisions relating to the appointment of auditors apply to LLCs.  This is due to Article 104, but also a specific provision in Article 102.  These contain a couple of important practical points.  Firstly, the auditor must attend the LLC's annual general meeting and read out the content of its report.  This means that, as a matter of course, LLCs must send a notice of meeting to the auditor and require their attendance.  Secondly, the Ministry appears to require an LLC to replace its auditors after three successive years in office, by expressly applying Article 243.  However, the additional wording in the Resolution concerning auditors does not refer to this requirement.  Nevertheless, LLC managers are advised to assess the length of service of their current auditors.
  • Invitations to attend a general assembly (Articles 174 to 176) – the Articles which set out who can request the manager(s) to call a general meeting of the company apply to LLCs.  This includes shareholders holding more than 20% of the capital (thereby allowing a minority partner in an LLC to request a meeting, even where there is no prospect of it being able to pass resolutions), the LLC's auditor and the DED in certain circumstances (including if it finds that there has been a breach of the Law or the company's MOA).  See also the new right to call an urgent general assembly in the additional points below.
  • Liability of directors – the Ministry has applied some of the provisions relating to the liability of a PJSC director to an LLC manager.  Some of these provisions deal with the same concepts as provisions specifically included in the LLC sections of the Law.  In some cases, the LLC provisions differ in their detail. For example, Article 162 states that a PJSC director may be liable for "mismanagement", whereas Article 84 describes liability for an LLC manager for "gross error". Therefore, it is less clear which standard now applies.

What has not been expressly clarified?

There are a few concepts which may carry over to LLCs that have not been dealt with specifically by the Ministry.  Of particular note is the prohibition on providing loans to directors and their family members.  There is no equivalent provision in the LLC sections of the Law and so, on the face of it, this Article 153 applies to LLCs.  A breach of this provision is a criminal offence and so, it is still advisable to assume that it does capture LLCs.  Therefore, any accommodation or other types of loan to managers of an LLC should be restructured.

In addition, Article 164 on unfair prejudice is not covered in the Resolution.    Consequently there is still a risk that a minority shareholder could bring court proceedings with the support of the DED, where it considers a corporate action to be taken against its interests.  This is not dissimilar to the suspension of a shareholder resolution under Article 191, which does expressly apply – see above.

Additional points contained in the Resolution

The Resolution contains some additional rules which apply to the operation an LLC.  For example:

  • There are new matters for which a special resolution of the LLC's partners is required.These include charitable donations, and a sale of more than half of the company's assets by one or more transactions in any 12 month period.
  • The Resolution states that if an LLC is managed by a board of managers, the chairman and deputy chairman must be appointed by the general assembly.It is unclear whether it will be possible to provide for them to be appointed in a different way in the MOA, for example by one of the partners.Note also that the chairman has the casting vote.If this is not wanted, the parties must state this in the MOA expressly.
  • There is a new right for partners holding 10% or more of the shares in an LLC to ask the DED to call a general meeting in urgent cases.Partners holding at least 10% of the capital may request that matters be added to the agenda during the course of the meeting, and there is an additional right for partners holding 5% or more of the capital to request the DED to add an item onto the agenda of a general meeting before the meeting is held.

The 30 June deadline for "adjusting positions"

The Resolution does not address the impending 30 June 2016 deadline for existing LLCs to "adjust their position" under Article 374 of the Law.  Therefore, unless a separate extension is granted shortly, companies must comply with the Law to its fullest extent, including amending any inconsistent provisions in their MOAs.

Under Article 374, the Law provides that any company which has failed to do so will be "deemed as dissolved".  What this means in practice is unclear, for example whether a court order will be needed by the DED to take concrete steps to de-register a company under Article 295.  However, our advice remains that LLCs should review and amend their MOAs as quickly as possible to comply with the Law and to take advantage of its deregulatory aspects.  

Ministry Of Economy Clarifies The Application Of The UAE Commercial Companies Law To LLCs

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.