The UAE has introduced a new Commercial Companies Law (UAE Federal Law No. 2 of 2015) (the New CCL), which replaces the previous Commercial Companies Law (UAE Federal Law No. 8 of 1984, as amended) (the previous CCL). The New CCL will come into force on 1 July 2015. In this briefing note, we comment on the key provisions of the New CCL and compare and contrast them with the regime in the previous CCL. This note is based on the Arabic version of the New CCL, as published in the March 2015 edition of the Official Gazette.
Cabinet and Federal Law exemptions: the New CCL, like the previous CCL, sets out a list of instances where companies may be exempt from its application. These include: (i) where a Cabinet Resolution has been issued (this approach was adopted in the recent Emaar Malls Group IPO and the Dubai Parks and Resorts IPO, where the listed companies secured exemptions from specific provisions of the previous CCL by way of a Cabinet Resolution); and (ii) where other Federal Laws specifically exempt companies from the application of the Companies Law (e.g. the Federal Telecommunications Law, which allows telecoms companies to elect to be exempt from the Companies Law). [Articles 4 (1)(a) and 4(1)(e)]
wholly owned by the Federal or an Emirate Government (and wholly owned subsidiaries of such companies), it has narrowed the instances of availability of the exemption by: (i) limiting the application of the sector specific exemptions (as discussed above); and (ii) requiring a company that: (A) is exempt by virtue of being wholly Government-owned; (B) is relying on a sector specific exemption; or (C) has an existing exemption under the previous CCL, to cease its reliance on the exemption if it undertakes an IPO or lists its shares. So practically speaking, if a Government-owned company undertakes an IPO it will (in the absence of securing an exemption by way of Cabinet Resolution) be subject to the New CCL and be required to carry out its IPO in accordance with the provisions of the New CCL.
Sector specific exemptions: the New CCL retains the exemption afforded to companies operating in the fields of oil, power generation, gas production and water desalination and expands its application to companies operating in the energy sector. However, this sector exemption is narrower than what was provided for under the previous CCL as it requires at least 25% of a company’s share capital to be held directly or indirectly by the Federal or an Emirate Government. [Article 4 (1)(c)]
Forfeiture of exemption: whilst the New CCL has expanded the list of instances where a company can be exempt from its application to include companies
It is expected that the Emirates Securities and Commodities Authority (SCA) will include as part of its executive regulations clarification as to when such company would no longer be exempted. [Article 4 (2)] Exemptions applicable to free zone companies: companies incorporated in free zones remain exempt from the application of the New CCL. If legislation in a free zone were to allow a free zone company to operate “onshore” (i.e. outside the free zone and in the UAE), then the New CCL would apply to such free zone company (it is not clear how this would work in practice). A free zone company would, however, not be permitted to operate onshore unless and until procedures to deal with the registration of such free zone companies are addressed by way of Cabinet Resolution. [Article 5].
Foreign ownership restrictions: the New CCL does not diverge from the previous CCL in this regard and retains a 49% limit on foreign ownership. In addition, the New CCL appears to be more restrictive, as it grants the Cabinet of Ministers the right, upon the recommendation of the Minister of Economy, to limit certain sectors to UAE nationals only. [Articles 10 (1) and 10 (2)].
Future developments: notwithstanding this foreign ownership restriction, the Minister of Economy has separately indicated the Government’s intention to enact a new foreign investment law that would relax the foreign ownership restriction in certain (but as yet unspecified) industries and sectors. Until the new foreign investment law is enacted, it remains to be seen what position the authorities will take in relation to companies whose activities do not fall within the exempt list but continue to maintain de facto (i.e. indirect) 100% foreign ownership.
Limited liability companies (LLCs)
Number of shareholders: the New CCL maintains the maximum limit of shareholders in an LLC at 50. It also allows an exception to the requirement for an LLC to have a minimum of two shareholders, by permitting a UAE natural or juridical person to incorporate a “single person” LLC. Details of how this will be applied in practice remain to be seen. [Articles 71 (1) and 71(2)]
Pre-emption rights: similar to the previous CCL, the New CCL imposes statutory pre-emption rights on a transfer of shares to non-shareholders. The pre-emption process remains the same overall, save that if there is a disagreement on pricing between the shareholders, the pre-emption price will be determined by technical/financial experts (as opposed to the company’s auditor). This pre-emption process remains sub-optimal from a selling shareholder’s point of view as it may require it to sell its shares to another shareholder at a pre-emption price which may not necessarily be the same as the price offered by a third party purchaser. [Articles 80 (1) and 80 (2)].
Governance and managers: although it was anticipated that the New CCL would further develop the concepts relating to the governance of LLCs by introducing a “board of directors” structure, it has retained the language in the previous CCL which provides that LLCs will be managed by one or more managers. One positive development is the removal of the requirement for a maximum of five managers. [Article 83]
Invitations to general assemblies: the New CCL better serves the requirements of practicality and modern technology, by now allowing invitations to attend the general assembly of LLCs to be sent by any means of communication that the shareholders agree upon (unlike the previous CCL which restricted these communications to registered mail). In addition, the New CCL sets a minimum notice period of 15 days and (in line with international market practice) allows the shareholders to agree on a shorter notice period (unlike the previous CCL, which required that shareholders’ meeting notices be sent to the shareholders at least 21 days prior to the meeting). [Article 93]
Quorum and adjourned meetings: the quorum for general assemblies has been raised from shareholders representing 50% to shareholders representing 75% of the share capital. Non-quorate meetings are to be reconvened within 14 days from the date of the first meeting and will only be quorate if attended by shareholders representing 50% of the share capital. If a quorum is not present at the second meeting, then a third meeting is to be held after 30 days from the date of the adjourned meeting and such meeting will be quorate provided that at least one shareholder is in attendance. Under the previous CCL, a non-quorate meeting would reconvene within 21 days from the date of the first meeting and would be quorate provided that at least one shareholder was in attendance. [Article 96]
Pledge over shares: the ability to create a pledge over the shares of an LLC is now included in the New CCL and as a result, shares in an LLC can be pledged and the pledge can be registered in the Commercial Register. This is a welcome development as it means that LLCs can now be more effectively used in financing structures, have greater access to debt finance and offer enhanced collateral. Although under the previous CCL there was nothing to prevent shares of LLCs being pledged, the lack of a specific recognition of this possibility under law, coupled with an inability to register such a pledge or take physical possession of share certificates, meant that pledgees faced considerable enforcement risk when taking an LLC pledge. Some enforcement risk still exists under the New CCL, however, as there is still an inability to take possession of share certificates; there is no possibility of pledgees holding pre-signed but undated share transfer forms; and pre-emption rights will continue to apply. [Article 79].