The issue of the new Commercial Companies Law, Federal Law No. 2 of 2015, was announced by the UAE Government on 1 April 2015 and will come into effect three months after the date of publication in the Official Gazette. The new law introduces changes which will affect some of the structures used by foreign investors to establish businesses in the UAE. This article looks at some of the key changes and where the UAE government has left the previous position unaltered.
Foreign ownership restrictions
The nature and extent of the UAE foreign ownership restrictions has been the subject of political debate for a number of years. This is against a backdrop of increasing economic liberalisation in other GCC countries, at least on the face of the law. For example, in 2010, the Qatari government introduced the possibility of foreign investors owning more than a minority stake in Qatari companies in certain specified business sectors, such as tourism, health and education.
For now, the position in relation to the percentage capital which must be held by a UAE national, or a company wholly owned by UAE nationals, remains unchanged from the previous Commercial Companies Law (Federal Law No. 8 of 1984) (the 1984 Law). One or more UAE nationals must hold at least 51% of the share capital of any UAE company under Article 10(1) of the new law (where the company is partly owned by non-GCC nationals).
The new law reserves the power to the UAE Cabinet of Ministers to introduce additional regulations which restrict certain business activities to UAE national ownership only (such as commercial agencies and recruitment agencies which must be owned by Emiratis). There is no express provision which empowers the UAE Cabinet to relax the ownership restrictions. The UAE Minister of Economy has made clear that foreign ownership will, instead, be covered in a new Foreign Investment Law, which may allow wholly foreign owned companies in certain sectors of the economy.
Branch offices: sponsorship requirements
Under the new law, the requirement to appoint an agent who must be a UAE national, or a company which is wholly owned by UAE nationals, remains unchanged. Therefore, foreign companies wishing to do business in the UAE, without incorporating a new corporate entity, will still be required to appoint an agent and produce a notarised agency agreement as part of the branch establishment process.
Although the UAE requirements for local branch sponsors have not been relaxed, it is important to bear in mind that the option of using a branch entity to operate a services based business onshore in the UAE is not generally available in other GCC countries. For example, Kuwait does not allow non-GCC investors to operate through a branch at all and, in Qatar, the use of a branch is limited to companies which have entered into a contract with the Qatar government (or government owned agency or company), and only in order to perform that contract.
LLCs: changes which affect foreign investors
LLCs are the most commonly chosen investment vehicle for foreign investors looking to establish an entity with separate legal personality and with limited liability for its shareholders. Generally, an LLC offers the most flexibility for structuring management and shareholder control (subject to the foreign ownership restrictions).
The following is a list of some of the amendments made by the new law which may affect the structuring of LLCs used for foreign investment:
- No cap on number of directors: the 1984 Law set the maximum number of directors which an LLC could have at five. Under the new law, the maximum has been removed. Where there is more than one director, they form a board with such powers and functions as set out in the memorandum of association. The removal of the cap enables more flexibility in structuring the management of the LLC. For example, often foreign investors are interested in having a high number of directors, with a spread of overseas and local representatives with delegated authorities, and different layers of management control.
- Share pledges: Under the 1984 Law, there was much debate as to
whether it was legally permissible for a shareholder to pledge its
shares in an LLC as security. Article 79 of the new law makes clear
that it is possible for a shareholder to pledge its shares to
another shareholder, or to a third party. The pledge must be
registered in the Commercial Register, created in accordance with
the LLC's memorandum of association and under a specific
document for that purpose. Article 81 goes on to state the method
by which the pledge may be enforced against the shares in the case
of insolvency of a shareholder. If the creditor is another
shareholder in the same LLC, it may agree with the pledgor and the
LLC to acquire the shares. If the creditor is a third party, the
shares must be offered for sale by way of public auction, although
the LLC may elect to buy-back those shares from the bidder on the
same terms within 15 days of the auction. In either situation, the
remedies for the creditor are not self-help remedies because the
agreement of third parties is required in order to obtain the
shares, or the cash equivalent, to recover the debt due.
This change was widely anticipated following the release of the 2011 draft of the law and due to a policy change in the Dubai Department of Economic Development in relation to the ability to register a share pledge in the Commercial Register in favour of a UAE financial institution. However, there are a number of areas in relation to the pledge which will need to be clarified in practice under the new law. In particular, the interaction between the pledge provisions and the foreign ownership rules and the way in which a pledge may be perfected as regards other creditors of the shareholder is not clear. For example, the Commercial Register is not open to public inspection and therefore it is difficult for a prospective creditor to be certain as to prior competing interests without the co-operation of the LLC. In addition, the new law does not require a share certificate to be issued (which could be retained by the creditor). The memorandum of association may require a note of the security to be made in the company registers, however, as some protection for the creditor.
Share pledges are an important topic for foreign investors choosing to incorporate an LLC in the UAE. The foreign investor will often lend the amount of the capital to the UAE national shareholder to enable it to acquire its 51% interest and the foreign investor will require security for that loan. Therefore, confirmation that share pledges are legally enforceable is welcome.
- Increase in shareholder numbers: it is now possible for LLCs to have up to 75 shareholders. This is an increase from 50 shareholders in the 1984 Law. In practice, this is unlikely to have a significant effect on most LLCs. It is unusual for an LLC to have a large number of shareholders because all share transfers are subject to pre-emption rights and any change in the memorandum requires all shareholders to attend the public notary to approve the change.
- Shareholders meetings – notice: there have been a number of modernising changes made to the way in which LLC shareholder meetings may be conducted. First, the notice period for a shareholder meeting has been reduced from at least 21 days to at least 15 days. It is also possible for the shareholders to consent to shorter notice with unanimous approval. In addition, the method of providing the notice of meeting to shareholders is no longer restricted to registered letter: the memorandum of association may set out any other permissible method of notice, which may presumably include email notice.
- Delegation by shareholders: it is now possible for a shareholder to delegate attendance at a shareholder meeting to a third party who is not another shareholder of the LLC. This provides more flexibility for individual shareholders. In the case of a corporate shareholder, different authorised representatives of that shareholder (usually employees) may attend and vote on behalf of the corporate shareholder.
- Quorum and voting rights: the quorum and voting requirements of
LLC shareholder meetings have been amended. It was previously the
case that, in order to pass an ordinary shareholder resolution,
shareholders representing at least 50% of the share capital had to
vote in favour of the resolution. There was not, however, any
separate quorum requirement. In practice, the quorum for the
meeting also had to be shareholders representing more than 50% of
the share capital (and potentially more, if there was no certainty
that all the shareholders present would vote in favour).
Under the new law, there is now a separate quorum requirement. For a shareholder resolution to be passed, there is a two step process: shareholders holding at least 75% of the share capital must be present at the meeting for the first time the meeting is called, in order for the meeting to be quorate. Resolutions are then passed by the majority of shareholders present at the meeting voting in favour, or such higher number as specified in the memorandum of association. This is a numerical majority of shareholders at the meeting, and not based on percentage capital holdings. It is not clear whether the memorandum of association may provide, instead, for all shareholders (whether present or not) to vote in favour. Any change to this effect will need to be approved by the public notary.
If the requisite quorum is present first time, there is no material effect on the "typical" UAE LLC comprising one foreign shareholder holding 49% of the shares and one UAE national holding 51% of the capital if the meeting goes ahead the first time it is called. For companies incorporated under the 1984 law, the memorandum of association usually requires that all shareholder resolutions to be passed by the votes of shareholders holding at least 75% of the capital (or with unanimous approval). Therefore, the UAE national shareholder is unable to pass a shareholder resolution acting alone and the foreign investor had a blocking right. Under the new law, provided that all the shareholders attend the meeting first time, the foreign investor will have the same blocking rights because the meeting will not be able to proceed without it and, with two shareholders present, both would need to vote in favour.
However, there are certain situations in which the effects of the new law will need to be considered more carefully. In particular, if there are more than two shareholders in a UAE LLC, it will be important to determine which combination of shareholders may hold quorate meetings together, without all being in attendance. In addition, it will be critical for shareholders to have watertight powers of attorney or other delegations of authority in place for others to attend meetings and vote on their behalf. Missing the first shareholder meeting may have a negative impact: if a quorum is not reached first time, the requisite quorum decreases to holders of 50% of the share capital needing to be present in person and, on the third attempt, no specified quorum is required. This means that the UAE national shareholder would be able to pass shareholder resolutions without the foreign investor being present, if the first meeting does not occur and that any shareholder could single-handedly pass a shareholder on the third time a meeting is convened. The new law does not state that it is possible to provide for a higher quorum under the memorandum of association.
It is important to note that proper notice of the meeting must be given, but the new law still requires shareholder meetings to be attended in person. There is no provision which expressly allows the memorandum to provide for other ways of passing shareholder resolutions. In practice, the memorandum of association may provide for written resolutions, but these require all shareholders to sign to reduce the risk of the validity of the resolution being challenged.
- Holding companies: the new law allows for an LLC (and a joint stock company) to be established the sole object of which is to hold subsidiaries incorporated in the UAE or overseas. A Holding Company may undertake ancillary activities to that primary object which are set in an exhaustive list in Article 267: management of its subsidiaries, providing loans, guarantees and finance to its subsidiaries and acquiring moveable assets, real estate and intellectual property assets for the purposes of its holding activities. A Holding Company will not be entitled to trade or undertake any other activities. Such a company will be required to have the words "Holding Company" in its title. Under Article 270, it will be required to produce consolidated group accounts in accordance with internationally accepted accounting and audit practices and standards. This is a welcome addition to the company structuring options which was not available under the 1984 law under which foreign companies frequently had to find an appropriate licence category. The practical requirements related to these Holding Companies, such as the commercial premises requirements, are however yet to be clarified.
What do we need to do to implement the new law?
The new law does not contain any provisions which deal with the implementation of the new law by existing companies, such as "grandfathering provisions" under which the old legislation continues to apply to companies established under the previous law. The new law will apply to all UAE companies from date falling three months after its publication in the Official Gazette, as well as all UAE companies to be established in the future.
The law makes some important changes to the way in which a UAE LLC operates from a management and shareholder perspective. In certain cases, LLCs will want to ensure that their current memorandum of association allows them to take advantage of any new flexibility provided for in the law and takes into consideration any more restrictive amendments. We recommend that all companies reconsider their memorandum of association and shareholder arrangements, together with any corporate governance guidance provided to directors, as soon as possible to ensure that they get the best from the new UAE company law regime.
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.