Rima Mrad of BSA Ahmad Bin Hezeem & Associates LLP looks at the potential impact of the new Foreign Direct Investment law on existing shareholding arrangements in companies.
The enactment of the ground-breaking Federal Decree Law No. 19/2018 on foreign direct investments towards the end of 2018 was a clear indication of the UAE's continuing eﬀorts to encourage and increase foreign investments in the country. Prior to the enactment of this law, there had been a number of steps taken to enhance commercial laws and regulations in areas which were potentially relevant to foreign investment starting with the remodeled UAE Federal Law No. 2 /2015 On Commercial Companies, UAE Federal Law No. 9/2016 on bankruptcy and Federal Law No. 20/2016 on pledging movable assets as a guarantee for debts.
All these laws have combined to creating an overall framework which better regulates the environment under which companies in the UAE are operating and helps to support more mature and complex commercial transactions and the prospects of new and innovative investments.
Some Key Changes
This new legal framework has brought in signiﬁcant changes, which include some key developments. Firstly, non-UAE nationals can now own 100% of UAE entities operating in certain sectors which will be deﬁned by a Cabinet Decision. Unless otherwise decided by the Cabinet, these sectors will exclude banking and ﬁnance, insurance, oil and gas, water and electricity, telecommunications and post services, air and land transportation, commercial agencies and pharmaceutical services. There is also signiﬁcant protection granted to foreign investment projects which are established under Federal Decree Law No. 19/2018 which restrict the possibilities of seizure or repossession. In addition, Federal Law No. 2 /2015, and Federal Law No. 9/2016 together are helping limited liability structures have more ﬂexibility in managing their operations when they face tight ﬁnancial issues. For example, cheques are widely used in the UAE as a way of securing payments and contractual obligations. It is very common to see investors ﬂeeing the UAE the moment they are unsure about their ability to pay a cheque as unhonoured cheques can lead to the detention of the signatory. A recent change of law in Dubai may also be the beginning of a new approach as bounced cheques below a certain level will no longer lead to the imprisonment of the individual who issued them. Federal Law No. 9/2016 is also allowing corporations to reach a settlement with their creditors under the supervision of the Court and is giving some level of guarantee for investors and creditors to help ensure equitable treatment in case of default.
Side Agreements and Nominee Services
Although side agreements covering limited liability company ownership in the UAE are widely recognised, the court interpretation of these arrangements has always created some levels of insecurity about their value and eﬀect. Going forward, Federal Decree Law No. 19/2018 is expected to side-line these side agreements in the sectors it will cover. Prior to Federal Decree Law No. 19/2018, it was also fairly common for LLC's to use nominee services to circumvent the terms of the commercial companies' law. Although these arrangements are not fully compliant with the current legislative framework, they were used by investors to do business in the UAE despite the associated risks. The disadvantages of these arrangements were disregarded when considering the beneﬁts associated with the possibility of using them to be able to do business in the UAE market.
Federal Decree Law No. 19/2018 will have a direct impact on the structuring of shareholder relationships in existing corporations which are currently co-owned by UAE persons with the minimum of 51% shareholding. While these structures are fairly common and have continued to exist in the UAE, it is still expected that foreign investors will look forward to beneﬁtting from the FDI Law to remodel their corporate structures. Federal Decree Law No. 19/2018 is expected to enhance the level of trust in the UAE and boost the value of investment injected by foreign entities to handle their Middle Eastern operations. The extent to which the FDI projects will replace existing structures will heavily depend on the nature of sectors that will be able to use the advantages and privileges awarded under this law.
Speed on Impact
We expect to see existing shareholding structures negotiated over the next few years as the shift from current company shareholding structures to those possible under Federal Decree Law No. 19/2018 will not be automatic. While new corporations and start-ups will be able to beneﬁt from Federal Decree Law No. 19/2018 as soon as the sectors coming under it are deﬁned; existing corporations will need signiﬁcant time and eﬀort to optimize the change in their structure. This includes changing their corporate documents and reaching an arrangement with nominee partners to transfer their shares to their respective names and at the same time obtaining the approval of the FDI Committee to be formed under Federal Decree Law No. 19/2018. Large corporations and multinationals will be the ﬁrst to push for these changes as they have always been wary of the risks associated with side arrangements. While these risks may not have stopped these entities from investing, they may have impacted the size of their investments. We are hopeful the expected security brought in by Federal Decree Law No. 19/2018 will lead to more innovative and unique start-ups choosing the UAE as a launch pad. Federal Decree Law No. 19/2018 could not have come at a better time with the key role that the UAE is playing in the regional technology revolution and the associated investment in building a strong accelerator culture. It is still too early to measure the impact of Federal Decree Law No. 19/2018 on overall commercial operations in the UAE; however, this should become clearer as and when the Cabinet Decisions which are relevant to the FDI Law are implemented.
Published first by Emirates Law Magazine.
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