Introduction:
Investment is a cornerstone of corporate governance under Federal Decree-Law No. 32/2021 on Commercial Companies Law (Companies Law), where shareholders play a pivotal role in the financial health and prosperity of a company. This article explores the rights and responsibilities of shareholders regarding their investments and profit sharing, outlining the procedures for amending the Memorandum of Association in accordance with legal provisions.
In accordance with the UAE Companies Law, particularly Articles 101 to 104, shareholders of a Limited Liability Company (LLC) have specific rights and responsibilities regarding investment and profit sharing. The law provides guidelines on amending the Memorandum of Association (MoA) to reflect changes in capital and ensure equitable profit distribution among shareholders.
Investment and Capital Amendment:
Under Article 101 of the Companies Law, any amendment to the MoA
or capital increase/decrease requires approval from at least
three-quarters of shareholders representing membership interests in
the LLC. This amendment process ensures that changes in capital
reflect proportional adjustments to shareholders' membership
interests. It is necessary that financial obligations cannot be
increased without unanimous consent from shareholders.
Further, Article 103 of the aforementioned law mandates that an LLC
must allocate 5% of its net profits annually to form a statutory
reserve unless shareholders decide to terminate allocations once
the reserve reaches half of the company's capital.
Compliance with Legal Requirements:
Article 104 stipulates that LLCs must adhere to the provisions applicable to Joint Stock Companies (JSCs) for matters not explicitly covered in the Companies Law, ensuring consistency in corporate governance practices. This includes electing auditors annually and complying with auditing standards to maintain transparency and accountability.
Process for Amending the Memorandum of Association:
- Shareholders proposing amendments to the MoA must submit a detailed proposal outlining the nature and justification for the change.
- Amendments require approval by at least three-quarters of shareholders during a general assembly meeting.
- Upon approval, the amended MoA must be registered with the relevant authorities, ensuring legal validity and adherence to regulatory requirements.
Investment Rights and Responsibilities: Shareholders in UAE companies hold essential rights concerning their investments. These include the right to:
- Participate in major decisions affecting the company's capital, including amendments to the Memorandum of Association and changes in share capital.
- Contribute to the company's capital through financial investments or contributions in kind, which must be accurately valued and documented to comply with legal requirements. Article 347 protects shareholders from the overvaluation of contributions in kind.
Profit Sharing: Profit sharing forms a fundamental aspect of shareholder rights and reflects the company's financial performance. Key aspects include:
- Shareholders are entitled to a share of the company's profits in accordance with the Memorandum of Association and statutory provisions under Article 348.
- The distribution of profits must adhere to the provisions of UAE Company Law to prevent violations and legal consequences.
Conclusion:
Investment and profit sharing are integral components of shareholder rights under UAE Company Law, ensuring transparency, accountability, and legal compliance in corporate governance. By understanding these principles and adhering to legal provisions, companies can encourage trust among shareholders and promote sustainable growth.
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.
