On January 2, 2021, the UAE will bring into effect a series of significant amendments (the “Amendments”) to the main law governing business activity in the country — Law 2 of 2015 Regarding Commercial Companies (the “Companies Law”). Most importantly, the Amendments will eliminate a section of the Companies Law that presently requires minimum Emirati ownership of 51% in the capital of any onshore company. The Amendments will also eliminate a requirement for the majority of the directors of certain UAE companies to be UAE nationals. Although these changes would appear to pave the way for unrestricted foreign ownership of all UAE onshore companies, the Amendments give UAE authorities the power to determine that certain economic activities with “strategic impact” will remain subject to some minimum level of Emirati capital participation.
While the law detailing the Amendments will be effective on January 2, 2021, the key changes abolishing the foreign ownership restrictions (specifically, those contained in articles 10, 151 and 329 of the Companies Law) will not immediately come into force. Instead, they will come into force 6 months after the Amendments are published in the official gazette. Until then, the foreign ownership restrictions will remain unchanged in the UAE. During this period, the UAE may publish its list of activities that have “strategic impact”, which are those activities that may remain subject to some foreign ownership limitations. Only when this happens, will we know the true scope and breadth of the ownership limit reforms that are being introduced.
The Amendments follow interim steps that the UAE has taken in recent years towards the liberalization of ownership limits. Most notably, the UAE passed Law 19 of 2018 Regarding Foreign Direct Investment (“FDI Law”), which eliminated ownership restrictions for a ring-fenced set of economic activities. The FDI Law also allowed companies to apply on an ad-hoc basis for exemptions from the ownership restrictions.
The Amendments effectively reverse the present framework – unlimited foreign ownership will become the rule rather than the exception. In addition to amending key provisions in the Companies Law, the Amendments will repeal the FDI Law in its entirety, such that all industries will be open to unlimited foreign ownership, unless they are deemed to have “strategic impact” or are otherwise exempted on other limited grounds. If, as we expect, the “strategic impact” list is limited in scope, the Amendments will reflect a truly transformative reform to UAE foreign direct investment rules.
These reforms could reshape the legal and economic landscape of the UAE in important ways. In addition to stimulating inbound greenfield investment, they should boost merger and acquisition activity in the UAE. The range of exit options and potential buyers available to UAE businesses will substantially increase. In addition to greater private transaction flexibility, UAE businesses could also have new access to capital markets, either through direct listings that may not have been possible because of previous ownership restrictions, or by becoming acquisition targets for Special Purpose Acquisition Companies (SPACs) that are actively targeting high-performing emerging markets.
The impact of the reforms on the UAE's long term legal landscape will be especially interesting to observe. It is difficult to foresee how these Amendments will impact the prevalence of free zones in the UAE. Although certain free zones will continue to be attractive because of their unique offerings (such as the financial free zones and the port free zones, which offer incentives not available onshore), other free zones that do not offer a differentiating product could be a casualty of these reforms. At some point, it may be necessary for the UAE to contract the number of free zones and instead to pursue a broader harmonization of the laws regulating the onshore environment and the 45+ free zones that are presently in operation. In addition, with the option of establishing a business presence onshore now readily available to foreign investors, it will be interesting to see whether the Emirates will more strictly enforce the rules that restrict a free zone entity from operating onshore. Although free zone entities are only authorized to operate “in and from” the free zone territory in which they are established, because of the current limitations on foreign ownership these restrictions have not been strictly enforced.
While the changes to the ownership restrictions are the most ground-breaking, the Amendments introduce other important changes to the Companies Law, including changes impacting governance, conflicts of interest and mergers procedures, as well as a range of other issues.
Originally Published by Akin Gump, November 2020
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