New UAE Commercial Companies Law: Legal Reforms To .
Legal Insightsfrom PwC Legal Middle EastNew UAE Commercial Companies Law:Legal reforms to strengthen the legal andregulatory landscape of doing business inthe UAEMay 2015In briefAfter years of speculation regarding an overhaul of commercial companies law in the UAE, FederalLaw No. 2 of 2015 concerning Commercial Companies (“New CCL”) will come into force on 1 July2015, replacing the existing Federal Law No. 8 of 1984 concerning Commercial Companies (“OldCCL”).All companies are required to amend their existing memoranda and articles of association to reflect,and comply with, the changes introduced by the New CCL, and any companies that fail to make therequisite amendments by 30 June 2016 will be automatically dissolved.The stated objective of the New CCL is to continue the UAE’s development into a global standardmarket and business environment and, in particular, raise levels of good corporate governance,protection of shareholders and promotion of social responsibility of companies.Notable features of the New CCL include the recognition of the concept of holding companies,procedures for pledging shares, expert valuation of shares in kind (i.e. non-cash) and the requirementto rotate auditors (for Public Joint Stock Companies) every three years.By introducing specific and strategic amendments, the New CCL contains a number of helpfulimprovements and modifications on the Old CCL. This article provides an overview of the keychanges which will affect all types of companies operating in the UAE.www.pwc.com/me
Legal InsightsA COMPARISON OF THE NEW AND OLD REGIMES1.Key Changes for all UAE companiesNew CCLOld CCLPwC Legal commentaryNo provision explicitly invaliding anytransfer of shares that will be inbreach of the minimum UAE nationalshareholding of 51%. However, theOld CCL did prohibit any assignmentof UAE national shareholding belowthe 51% threshold.Despite much speculation, the New CCLretains the same approach as the Old CCLin relation to the foreign ownershiprestriction, i.e. 51% (UAE national) / 49%(foreign), or 100% GCC nationals.However, the UAE government isconsidering relaxing the requirement ofsuch restriction in certain industry sectorsunder a new Foreign Direct InvestmentLaw regime (timing of which is unclear atthis stage).Foreign ownership restrictionNew provision explicitly invalidingany transfer of shares which mayaffect the minimum UAE nationalshareholding of 51% (article 10 ofNew CCL).Holding companiesLLCs and JSCs are now permitted tobe established as holding companiesin order to conduct businessactivities solely through theirrelevant subsidiaries (article 266 ofthe New CCL).The concept of a “holding company”was not recognised.Director’s / manager’s dutiesA director / manager is a personauthorised to manage the companyand must preserve the rights andworks of the company with care of aprecise person (article 22 of the NewCCL). In addition, any provision inthe company’s memorandum andarticles of association exempting anydirector / manager from personalliability (that he / she bears in his /her capacity as an officer) is voidable(article 24 of the New CCL).Limited duties and obligationsimposed on directors / managers.Companies RegistrarThe Minister of Economy shall issuesa regulation setting out the activitiesand functions of the CompaniesRegistrar. In particular, theCompanies Registrar shall supervisethe trade name register (to avoiddouble registration), hold companyrecords and enable concerned partiesto inspect the relevant companyrecords (articles 33 – 38 of NewCCL).No Companies Registrar.In many other jurisdictions, setting-upholding companies is now a commonpractice for large corporategroups toachieve tax and/or other corporatebenefits in their corporate structure.By recognising the concept of a “holdingcompany” under the New CCL, the UAEwill become more appealing, as ajurisdiction, to large corporate groupswhen they are considering restructuring orestablishing a presence in the UAE.The New CCL introduces this explicitarticle:(a) stipulating that directors / managersmust act for the benefits of the company;and(b) voiding any provision in the company’smemorandum and articles of associationexempting a director / manager frompersonal liability.The intention is to bring directors’ /managers’ duties closer to internationalstandards.We await to see whether the establishmentof the Companies Registrar will lend morecoordination to the formation anddissolution of companies in the UAE.In theory, the Companies Registrar shouldprovide better access to corporate recordsby registering the information thatcompanies are legally required to supply.However, given that only “concernedparties” may request for information fromthe Companies Registrar, we do not expectthe general public will have access to suchinformation. 2015 PwC. All rights reserved.PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
Legal InsightsAccounting requirementsAll companies are required to keepaccounting records at their relevanthead offices for a minimum period offive years (article 26 of New CCL). Inaddition, all companies shall applyinternational accounting standardsand practices when preparing theirrelevant accounts in order to give aclear and accurate view of the profitand loss of the relevant companies.Limited accounting requirementsimposed on companies.Free zone companiesGenerally, the New CCL shall not beapplicable to free zone companies.However, if the laws of the free zonepermit certain free zone companiesto operate outside the relevant freezone (i.e. onshore), then the NewCCL shall be applicable to such freezone companies (article 5 of NewCCL).Not applicable to free zonecompanies.Excluded companiesCompanies exempt from the NewCCL are:(a) companies excluded by resolutionof the Federal Cabinet;(b) companies wholly owned byfederal or local government andcompanies held in full by suchcompanies (if a special provision tothis effect is contained in thecompany’s memorandum andarticles of association); and(c) companies operating in certainoil, gas or power sectors in which thefederal or local government directly,or indirectly, holds 25 per cent. (if aspecial provision to this effect iscontained in the company’smemorandum and articles ofassociation) (article 4 of New CCL).Only excluded companies byresolution of the Federal Cabinet andcompanies operating in certain oil,gas or power sectors.The aim is to bring accountability andtransparency of a company up tointernational standards. Consequently, acompany should be able to accuratelyreveal, at any time, the financial positionof the company, and enable shareholdersto verify that the company’s accounts areproperly kept in accordance with the NewCCL.It is helpful that the New CCL does permitcompanies to retain electronic versions oftheir documents (provided that suchdocuments will be saved in compliancewith a decree to be issued by the Ministerof Economy).Allowing certain free zone companies tooperate onshore will provide greaterbusiness flexibility / mobility and,therefore, it is logical for such free zonecompanies to be subjected to the New CCL.However, it is unclear how this will workin practice, as the Federal Cabinet is yet toissue a resolution to determine theconditions and requirements to registerfree zone companies to operate outside ofthe relevant free zone.Aside from excluded companies as set outabove, it is important that all companiesamend their memoranda and articles ofassociation by no later than 30 June 2016to comply with the New CCL. Anycompany that fails to do so shall be deemedto be dissolved (article 374 of New CCL).2PwC
Legal Insights2. Key changes for Limited Liability CompaniesNew CCLOld CCLSole shareholderOne natural person, or corporateentity, may be the sole shareholder ofa LLC (article 71 of the New CCL),and one corporate entity may be asole shareholder of a Private JSC(article 255 of the New CCL).A company with sole shareholder isnot permitted.Share pledgesAllows shareholders in LLCs topledge their shares, and such pledgesmust be made in accordance with thecompany’s memorandum andarticles of association, and benotarised. Such pledges shall only bevalid (against the company and/orrelevant third parties) from the dateof its entry on the commercialregister (article 79 of New CCL).No provision permitting shareholdersin LLCs to pledge their shares.Maximum number of directors/ managersThe management of an LLC can beundertaken by one or more directors/ managers as determined by thecompany’s memorandum andarticles of association or the generalassembly of the company (article 83of New CCL).A maximum of 5 directors /managers.Non-compete by directors /managersOther than with the consent of thegeneral assembly of the company, adirector / manager is not permittedto manage another competingcompany (including anothercompany with objects similar to thecompany) (article 86 of New CCL).No provision explicitly restrictingdirectors / managers from managingcompeting businesses.Valuation of shares for noncash considerationValuation of shares can be assessedin kind either by:Shareholders can agree to a valuationof shares in kind, and such valuationPwC Legal commentaryUnder the Old CCL, LLCs may only beestablished by a minimum of twoshareholders. Allowing a sole shareholderto incorporate an LLC means that soleshareholders may enjoy the benefit oflimited liability in their businesses byexercising their sole discretion.Given the continuing foreign ownershiprestriction, this change will primarilybenefit Emirati and entrepreneurs fromother GCC countries.The Old CCL was silent in respect ofpledging of shares, and so it wasquestionable whether shares can bepledged legally under the old regime. Byintroducing a new provision for perfectingsecurity by way of share pledge overshares in an LLC, it should improve accessto debt financing as shareholders will nowbe able to grant security over their LLCshares.However, it remains unclear how the newprovision will be interpreted as the NewCCL is silent in respect of the concepts of“share certificate” or “number / registeredshares” attributable to any shareholder inan LLC.Removing the cap on the number ofdirectors / managers appointed to an LLCwill allow for greater business flexibilityand networking, and enable talentedexternal advisers to sit on the board ofdirectors / managers (particularly helpfulto regional family businesses with a largegroup of companies).This new non-compete provision isconsistent with the new director’s /manager’s duties provision (i.e. directors /managers have to act for the benefits of thecompany).Directors / managers should be mindfulnot to breach this new non-competeprovision as, otherwise, such director /manager may be dismissed and requiredto compensate the company.Whilst it has become slightly more onerousfor the shareholders to agree to a valuationof their shares in kind (i.e. non-cashconsideration) as such valuation has to beapproved by the DED, the New CCL doesallow professional financial advisers (pre3PwC
Legal Insights(a) agreement with all of theshareholders, and subject to theapproval of the DED; or(b) by a financial consultantapproved by DED (article 78 of NewCCL).is prescribed in the company’smemorandum and articles ofassociation.approved by the DED) to assist with suchvaluation (which could potential expeditethe valuation process especially insituation where there is a disagreementbetween the shareholders).Notwithstanding that the assistance ofprofessional financial advisers will addcertainty to the valuation process, suchadvisers should be mindful not to actnegligently (or exaggerate the valuation),as this could, potentially, result in suchadvisers to be banned by the DED fromfuture mandates.3. Key changes for Joint Stock Companies (Public JSCs and / or Private JSCs)New CCLOld CCLShare capital (general)Key changes include:(a) only 30 per cent. of a Public JSC’sshare capital must be offered to thepublic in an IPO, and the New CCLalso stipulates that the Securities &Commodities Authority may issueresolutions concerning underwritingand / or book-building activities(articles 117, 123 and 129 of NewCCL);(b) minimum share capital of AED30 million for a Public JSC (article193 of New CCL), and minimumshare capital of AED 5 million for aPrivate JSC (article 256 of New CCL);(c) a Public JSC may have anauthorised share capital not in excessof twice the issued share capital(article 193 of New CCL);(d) more than one class of shares isnow permitted as the Federal Cabinetmay issue a resolution determiningrights, obligations and conditions ofdifferent classes of shares (article206 of New CCL); and(e) JSCs and their subsidiaries maynot provide financial assistance toany shareholder to hold shares,bonds and sukuk issued by thecompany (financial assistanceincludes loan, gifts, donations,company’s assets as security orprovision of security / guarantee ofthe obligations of another person)(article 222 of New CCL).Under the old regime:(a) 55 per cent. of a Public JSC’sshare capital was required to beoffered to the public on an IPO, andthere were no provisions concerningunderwriting and / or book-buildingactivities;(b) minimum share capital was AED10 million for a Public JSC, andminimum share capital was AED 2million for a Private JSC;(c) the concept of an authorised sharecapital was not recognised;(d) only a single class of shares ispermitted; and(e) there was no prohibition onfinancial assistance.PwC Legal commentaryIn essence, the intention of these variouschanges (some of which are stricter thanthe Old CCL, and some of which are morerelaxed) is to stimulate interest incompanies wishing to grow theirbusinesses through UAE capital marketfund raising, whilst at the same timeprovide more comfort and transparency topotential investors (especially nonprofessional investors from the public atlarge).4PwC
Legal InsightsProtection of minorityshareholdersNew measures include:(a) subject to the consent of board ofdirectors / managers and generalassembly of the company, a PublicJSC may not undertake transactions,with related parties, of a value inexcess of 5 per cent. of the sharecapital of such company (article 152of New CCL);(b) shareholders with 5 per cent. ormore of a Public JSC may apply tothe Securities & CommoditiesAuthority and / or a competent courtclaiming that the affairs of thecompany are, or have been,conducted to the detriment of any ofthe shareholders (article 164 of NewCCL); and(c) voiding any resolutions passedfor, or against, a certain class ofshareholders, or to bring a specialbenefit to a related party, withoutconsideration of the interests of thePublic JSC as a whole (article 170).Relatively limited protection ofminority shareholders.Auditors rotationAll Public JSCs must have one ormore auditors nominated by theboard of directors / managers, andapproved by the general assembly ofthe relevant company. In addition,the general assembly may appointone or more auditors for onerenewable year, provided that suchterm does not exceed threesuccessive years (article 243).No requirements to rotate theauditors every three years.Takeover regimeAny person, or group of associatedpersons, desiring to act in any waythat may lead to the takeover ofshares (or securities convertible tostocks) in the share capital of aPublic JSC must comply with allresolutions issued by the Securities &Commodities Authority (article 292of New CCL).No explicit provisions concerningtakeovers.Corporate governance regimeFor Private JSCs with more than 75shareholders, the Minister ofEconomy shall issue resolutionsconcerning a corporate governanceframework.No explicit provisions concerningcorporate governance.In light of recent financial uncertainly inthe global markets, protection of minorityshareholders has been very high on theagenda of companies wishing to promotegood corporate governance and corporatesocial responsibilities in order to regain theconfidence of small investors. The newmeasures under the New CCL are anotherstep to bring the UAE corporate practiceup to international standards.Public JSCs should be mindful not tobreach this requirement of rotatingauditors every three years (if the sameauditors have been retained up to thestatutory maximum appointment periodunder the New CCL).The New CCL includes a “placeholder” forthe introduction of a takeover code by theSecurities & Commodities Authority, andwe await confirmation on the timeline forthe development of the regulatoryframework of the takeover code.Similar to the provisional takeover codementioned above, the New CCL includes“placeholders” for the introduction ofcorporate governance frameworks forboth Public JSC and Private JSC, and weawait confirmation from the relevantauthorities on the timeline for thedevelopment of such corporate governance5PwC
Legal InsightsFor Public JSCs, the Securities &Commodities Authority shall issueresolutions concerning a corporategovernance framework.The board of directors / managers ofthe relevant Private or Public JSCshall be responsible for compliancewith the applicable corporategovernance framework, and failure todo so may attract a statutory penaltyup to a maximum of AED 10 million(articles 6 and 7 of New CCL).frameworks.The takeawayThere are, of course, various other changes that have been introduced in the New CCL that have not been discussed in thisarticle. However, this article aims to provide an overview of the key provisions rather than an exhaustive list of all of thechanges. Whilst the New CCL represents the first major overhaul of commercial companies law in the UAE since 1984,certain aspect remains ambiguous, and we await further guidance and clarifications from the relevant authorities in duecourse.Who we arePricewaterhouseCoopers Legal Middle East (PwC Legal) is a member of the global PwC legal services network thatcomprises more than 2,500 lawyers in over 85 countries. We are the only professional services firm in the Middle Eastwhich can provide you with a “one-stop-shop” service in every aspect of a transaction. Our Middle East legal team isbased in Dubai, with regional and international legal specialists bringing a combination of expert local knowledge andbest practices on corporate and commercial transactions (including corporate set-ups, entity governance andcompliance).Let’s talkFor a deeper discussion of how this issue might affect your business, please contact one of our authors:PwC Legal Middle EastAlan Wood (ME M&A Leader)Practitioner of Law (UAE)Solicitor (England & Wales)David Pang (M&A Specialist)Practitioner of Law (UAE)Solicitor (England & Wales)Direct: 971 (0) 4 304 3739Email: alan.wood@pwclegal.co.aeDirect: 971 (0) 4 304 3229Email: david.pang@pwclegal.co.ae6PwC
After years of speculation regarding an overhaul of commercial companies law in the UAE, Federal Law No. 2 of 2015 concerning Commercial Companies (“New CCL”) will come into force on 1 July 2015, replacing the existing Federal Law No. 8 of 1984 concerning Commercial Companies (“Old CCL”).
For market intelligence and information on doing business and exporting to the UAE, please see the U.S. Commercial Service in the UAE web page and the United Arab Emirates Country Commercial Guide prepared by the U.S. Commercial Service team in the UAE. More information about the UAE, check out the CIA Country Factbook - UAE.
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