The much anticipated new UAE Commercial Companies Law (Federal Law No. 2 of 2015) (the "New CCL") was published in the UAE Federal Official Gazette on 31 March 2015 and will come into force on 1 July 2015. The new CCL replaces the existing Commercial Companies Law (Federal Law No.8 of 1984) (the "1984 CCL") in its entirety – we take a look at the impact of the new CCL on the regulation of Public Joint Stock Companies in the UAE ("PJSCS").

The New CCL represents an important milestone and introduces some very helpful changes for PJSCs and paves the way for further changes in the future (though the much heralded relaxation of the foreign ownership restrictions has yet to materialise – see below for further details).In this article we focus on how the New CCL will affect PJSCs, as well as the key markets they are listed on – namely the Dubai Financial Market and the Abu Dhabi Securities Exchange (the "UAE Exchanges"). In particular, we will consider the impact the New CCL will have on:

  • initial public offerings by UAE companies
  • a PJSC's options in respect of capital raising
  • a PJSC's corporate governance
  • public M&A in the UAE.

IMPROVED REGULATORY ENVIRONMENT FOR IPOS ON UAE EXCHANGES

The New CCL incorporates some long awaited changes to the regulation of initial public offerings ("IPOs") on the UAE Exchanges. Whilst in a number of cases the issuance of detailed regulations has been deferred (in particular, in respect of local underwriting), collectively these changes have the potential to provide a welcome boost to the UAE IPO market.

Relaxation of free float requirements

Under the 1984 CCL (Article 78), the founders of a PJSC were only permitted to retain a maximum of 45% of the issued share capital upon listing on the UAE Exchanges (in other words a 55% 'free float' was required). Historically, this made pursuing a listing on the UAE Exchanges unattractive for many UAE companies (particularly family owned businesses) as it required the founders to relinquish control and become minority shareholders. It also led to the UAE Exchanges being compared unfavourably with international markets, such as the London Stock Exchange where the free float requirement is only 25% (and is capable of being reduced further by the UKLA on a case by case basis), when potential venues for listing were being considered.

A relatively recent response to this issue has been for companies considering an IPO on the UAE Exchanges to seek (and in some cases to successfully obtain) waivers in respect of the free float requirements. For instance, Emaar Properties was able to obtain permission to list just over 15% of the share capital of Emaar Malls on the Dubai Financial Market in Q4 of 2014.

The New CCL has reduced the free float requirement to 30% (and decreased the maximum percentage of shares that may be offered to the public an IPO from 80% to 70%). The reduced free float requirement will allow founders to remain the controlling shareholders of a PJSC following a listing and means the UAE Exchanges are no longer less attractive than many other capital markets in this respect. It is hoped that this will encourage the owners of UAE companies who have previously elected not to pursue a listing in order to maintain control to reconsider their options. It is also possible that the change may see UAE businesses that have elected to list their shares overseas returning to their 'home market' (as Damac Properties elected to do in Q1 2015) in order to capitalise upon their regional profile. It is, however, worth noting that a listing of the type undertaken by Emaar Malls (with a free float of just over 15%) would still require special exemptions to be made. It is unclear how forthcoming these will now be in light of the provisions of the New CCL (particularly, as the New CCL does not provide the Securities and Commodities Authority ("SCA") with any discretion to dis-apply the requirements, meaning a Cabinet Resolution would be required).

OVERVIEW – KEY PROVISIONS OF THE NEW CCL AFFECTING IPOS ON UAE EXCHANGES

  • Free float requirement reduced from 55% to 30%
  • Maximum stake that may be offered to the public in an IPO reduced from 80% to 70%
  • Book building and local underwriting expressly contemplated, but precise regulations are to be issued by SCA
  • Lock-in period for founder shareholders remains at two years post IPO
  • Lock-in period for founder shareholders remains

Lock-in period for founder shareholders remains

Historically, another drawback of seeking a listing on one of the UAE Exchanges has been that the 1984 CCL restricted the founder shareholders from selling down any of their existing shares into an IPO or disposing of shares for a period of two financial years from the date of the IPO. This extended lock-in period prevents founder shareholders from realising even a partial exit at the time of the IPO and has been viewed as particularly unattractive in light of the free float requirements (which at the same time required the founders to become minority shareholders). In practice, waivers of these provisions have been obtained in respect of a number of recent IPOs. It was hoped that the rights of the SCA to make exemptions to this rule on a case by case basis would be codified; however, the New CCL retains a two year lock-in period and only empowers the SCA to extend this period (to up to three years). As such, founders will have to continue to rely on the discretion of the authorities when seeking to realise an exit at the time of the IPO.

Underwriting in relation to capital raisings

Another positive development from an IPO perspective is that the New CCL, unlike the 1984 CCL, expressly contemplates that the SCA will issue resolutions regulating the local underwriting of IPOs and other capital raisings on the UAE Exchanges. The 1984 CCL contained no equivalent provision for underwriting.

Book-building

The New CCL provides that the SCA will issue a resolution regulating the conduct of book-built IPOs and other capital raises. The 1984 CCL contained no provision for book-building. Nevertheless, the practice already exists in the market (the pricing of the Emaar Malls IPO was conducted by way of a book-building exercise) and is regulated by Ministerial Resolution No. (728) of 2008 (Concerning the book building procedures for securities). Accordingly, unless the SCA elects to issue an amended resolution, the New CCL ought not to have an impact upon existing market practice.

Clarification of the process of conversion to a PJSC, but conditions remain

IPO's of UAE companies have frequently been undertaken via the conversion of existing limited liability companies ("LLCs") to PJSCs following the completion of the subscription for shares by the public. The New CCL, in contrast to the 1984 CCL, contains helpful provisions clarifying the steps required to complete the conversion of an LLC to a PJSC. However, it should be noted that the New CCL contemplates further regulations in respect of this by the SCA and/or the Ministry of Economy. The New CCL also confirms that a conversion of a LLC to a PJSC will be conditional upon: i) the company having completed two full audit cycles; and ii) the company having made average net distributable profits during the last two financial years equal to or greater than 10% of its share capital. The codification of these requirements in the New CCL will restrict the ability of companies, who are unable to demonstrate such a track record, to seek a listing on the UAE Exchanges.

INCREASED FLEXIBILITY IN RESPECT OF CAPITAL RAISING OPTIONS FOR LISTED COMPANIES

In addition to the important developments in relation to the conduct of IPO's, the New CCL introduces some positive reforms which will afford Boards with greater flexibility in respect of the management and structuring a PJSC's capital structure.

Disapplication of pre-emption provisions in respect of certain share issuances by PJSCs

Both the 1984 CCL and the New CCL incorporate pre-emption provisions which provide that existing shareholders have priority to subscribe to any new shares that a PJSC proposes to issue. Historically, the need to comply with pre-emptive provisions has been a barrier to UAE companies pursuing secondary equity issues. The New CCL incorporates a number of helpful new exceptions to this requirement as follows: for share issues to a 'strategic partner' that will bring a benefit to the company approved by both special  resolution of the shareholders and the SCA (Articles 223 and 224); for share issues conducted as part of a capitalisation of cash debts approved by special resolution of the shareholders (Article 225); for share issues conducted pursuant to a share option scheme for employees of the company approved by special resolution of the shareholders (Article 226); and for share issues conducted as part of the merger of two PJSCs approved by special resolution of the shareholders (Article 283).

These are very helpful and practical changes aimed at increasing a UAE company's ability to raise capital. In particular, the express ability to undertake a private placement of shares to a 'strategic partner' without the need to comply with pre-emption provisions has the potential to open up new sources of investment for listed companies. However, the definition of a Strategic Partner as a party who "provides technical, operational or marketing support to the company for the good of the company" means that the types of investor to whom this provision will apply is perhaps more narrow than might have been hoped (on its face a private placement to a purely financial investor may not be able to avail itself of this exemption).

Introduction of the concept of authorised share capital

The New CCL introduces the distinction between a PJSC's authorised and issued share capital for the first time and permits the articles of association of a PJSC to provide for an authorised share capital of up to two times its initial capital. Under the New CCL the board of directors may increase the issued share capital up to the limit of the authorised share capital upon approval by the general assembly. The introduction of the concept of authorised and issued share capital ought to make the completion of an issuance of new shares easier and brings the UAE into line with other jurisdictions. However, it should be noted that statutory limit on the term of a shareholder resolution authorising the Board to issue shares has been reduced from 5 years to 1 year.

The potential for PJSCs to have different classes of shares is contemplated, but not yet realised

A key drawback of the 1984 CCL was the lack of flexibility that companies had in structuring their equity capital. In particular, the 1984 CCL prohibited joint stock companies from issuing different classes of shares, such as preference shares. While this general prohibition remains, the New CCL opens the door to this possibility in the future by providing that the Cabinet may, on the recommendation of the SCA, approve the creation of different classes of shares as well as the rights and obligations attached to them. This is a positive development that has the potential to provide companies with an increased range of options when structuring their capital (particularly when coupled with the potential for completing private placements to Strategic Partners outside of the pre-emptive regime). However, because the New CCL does not contain any details regarding how different class rights will operate in practice, the full impact of these changes remains to be seen. It will be interesting to see whether issuers will actively pursue this option and how the SCA elects to exercise its discretion.

WHAT HASN'T CHANGED? FOREIGN OWNERSHIP RESTRICTIONS

The inclusion of a relaxation of the foreign ownership restrictions in the first draft of the New CCL (published in 2011) was widely welcomed as an important step that would provide a boost to the UAE Exchanges. However, these provisions do not appear in the New CCL. Accordingly, for the time being the status quo remains - the maximum permitted level of non-GCC ownership remains at 49%.

However, there are encouraging signs that liberalisation remains on the agenda - in 2013 the Ministry of Economy announced that provisions relaxing the foreign ownership limits (probably on a case by case or sector basis) will be included in a new Foreign Investment Law rather than the CCL. The UAE Minister of Economy and SCA Board Chairman, His Excellency Sultan bin Saeed Al Mansouri, reconfirmed this intention at the Annual Investment Meet on 30 March 2015 and stated that a draft law is at an advanced stage of consideration.

Tradeable issue rights are introduced

Unlike the 1984 CCL, the New CCL provides that shareholders will be entitled to trade their statutory subscription rights in respect of rights issues to other shareholders and third parties. It is worth noting that this change has been made in line with the existing arrangements under the SCA Board Decision No. (38) of 2013 concerning the "Regulation for Listing and Trading of Rights Issue for Capital Increase of Public Joint Stock Company" and that the SCA has already approved trading of issue rights (the first example being trading of issue rights in Eshraq Properties' issuance in November 2014).

Limitations on the value of bonds that may be issued by a UAE joint stock company have been removed

The 1984 CCL limited the value of the bonds that may be issued by a UAE joint stock company to an amount equal to its paid up capital. This restriction has not been included in the New CCL meaning that issuers are in theory able to turn to the domestic bond markets in circumstances where their equity capital would not previously have permitted them to do so. Again issuers ought to welcome the increased flexibility this change will bring when they are considering their capital raising options.

CORPORATE GOVERNANCE AND INVESTOR PROTECTIONS

The New CCL also contains a number of interesting provisions aimed at improving corporate governance and the accountability of the board and management of PJSCs to shareholders. In particular:

Corporate governance regime

The New CCL (Article 6) provides that the SCA will issue resolutions in respect of the governance of PJSCs. It remains to be seen whether any new resolution will be forthcoming or whether the governance rules set out in Ministerial Resolution No. 518 of 2009 ("MR 518") (which PJSCs have been required to comply with since 30 April 2009) will simply continue to apply.

Make-up of the board

The New CCL continues the requirement of the 1984 CCL that the majority of the directors and the chairman of a PJSC are UAE Nationals. A new requirement introduced by the New CCL is that two thirds of the directors must also be shareholders in the PJSC, that the number of directors be an odd number and that the maximum number of directors is 11 (previously, the maximum was 9). Existing PJSCs will need to review existing arrangements to ensure that they are in compliance with these provisions. The New CCL provides for cumulative voting when shareholders are appointing directors. This gives statutory status to the existing provisions of MR 518 that allow a shareholder to elect to either distribute his votes among candidates as he prefers or allocate his votes to a single candidate.

Directors' duties

The New CCL contains a new provision that directors must 'preserve the rights and works of the company for the benefit of the company' and act with the care of a 'precise person'. Whilst this is a welcome shareholder protection, it should be noted that MIR 518 already sets regulations for directors of companies listed on the UAE Exchanges which cross over with the New CCL. These include a requirement that directors, when exercising their powers and duties, "act honestly and loyally, taking into consideration the interests of the company and its shareholders, make the utmost effort and adhere to applicable laws, regulations and resolutions as well as the articles of association and internal regulations of the company".

Prohibition of related party transactions

The New CCL, unlike the 1984 CCL, includes express provisions that a joint stock company may not enter into transactions with related parties (being the board, senior executive management or employees or those companies in which such persons hold more than 30% of shares) of a value in excess of 5% of the share capital of the joint stock company, without the consent of the board, the shareholders and the approval of an assessor appointed by the SCA. Furthermore, the New CCL contains a general prohibition on related parties of a joint stock company utilising the information in their possession to achieve any interest whatsoever.

Invalid resolutions

The New CCL includes a new provision  that any board resolution of a joint stock company passed in breach of the New CCL, the memorandum of association of the joint stock company, for or against a certain class of shareholders or to bring a special benefit to the related parties or others without consideration of the interest of the company shall be invalid.

Shareholder claims for detrimental actions

The New CCL recognises for the first time the concept of unfair prejudice and provides that one or more shareholders (collectively holding at least 5% of the shares of a company) may apply to the SCA if the applicant shareholder considers that the affairs of the company have been or may in the future be conducted to the detriment of all or any of the shareholders. The CCL provides that, the court may annul an act or require action to be taken. The New CCL provides that if the SCA rejects an application, or does not review it within 30 days, the petitioning shareholders may make an application to the UAE courts. This is a welcome development that is in line with international practice aimed at ensuring that minority shareholders are properly protected.

No loans to directors

Like the 1984 CCL the New CCL prohibits a company making loans to directors. It should also be noted that the New CCL extends this prohibition to include director's family members. In addition to this, the New CCL does not (as the 1984 CCL did) include a provision permitting banks to provide loans to their directors on the terms applied to their customers. The effect of these amendments on existing arrangements will need to be considered by PJSCs and their directors (since non-compliance will constitute an offence under the New CCL).

PUBLIC M&A ACTIVITY

The New CCL includes a number of provisions that have the potential to impact how mergers and acquisitions of and by PJSCs are conducted and structured.

Takeovers

The 1984 CCL does not include a statutory takeover regime. The absence of a takeover regime containing provisions aimed at expediting takeovers (such as minority squeeze out provisions) has meant that the level of public M&A in the UAE has been lower than may otherwise have been the case. In practice the lack of a takeover regime has meant that the majority of public takeovers in the UAE have had to be completed by way of amalgamation/merger. Promisingly, the New CCL contemplates the establishment of a takeover regime, but unfortunately the details of this regime will only be clear when the SCA publishes its rules, regulations and procedures. The release of the takeover regulations will be eagerly anticipated and it is hoped that they will remove many of the barriers to parties pursuing public M&A in the UAE.

Impact on acquisition financing - new financial assistance prohibition for joint stock companies

Interestingly the New CCL also introduces a prohibition on the provision of financial assistance by any UAE company to its shareholders to enable the shareholder to acquire "shares, bonds or deeds in the company" (Article 222). Specific forms of prohibited financial assistance expressly mentioned in Article 222 include loans, gifts, the pledging of the assets of the company as security, and the provision of guarantees by the company.

This type of prohibition on the giving of financial assistance by public companies is not uncommon in other jurisdictions and its inclusion is in line with the efforts that have been made elsewhere in the New CCL to increase investor protection and accountability. However, it should be noted that the prohibition applies without exception (including, in the event that a PJSC was subsequently converted to a private company). This is likely to impact on the structure of acquisition finance for transactions in respect of PJSCs (where acquirers may otherwise have looked to use the target's assets as security).

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.