UAE: Effect of the Amendment to the Companies Law on LLCs
The UAE government has recently amended Federal Law Number 2 of 2015 (hereinafter referred to as “Old Law”) by issuing Federal Decree-Law Number 26 of 2020 (the “New Law”). The introduction of this amendment has effectuated an overhaul of the corporate landscape of the country. The new law introduces several changes in its provisions, but the most notable difference is removing restrictions concerning a UAE national’s existence as a majority shareholder.
The New Law allows foreign shareholders to acquire one-hundred percent (100%) shareholding in onshore companies. Accordingly, the requirements imposed under Old Law requiring fifty-one percent (51%) of shares to be held by UAE National(s) no longer apply..
Article 10 of the new law presupposes the creation of a committee that shall be responsible for enumerating all such activities having a strategic impact along with laying down prerequisites for licensing companies desirous of carrying out such activities. Under the Department of Economic Development's guidance, a ' Competent Authority' has been established under Article 10 (2) of the New Law. The said authority can determine the shareholding percentages and distribution to UAE Nationals, the minimum participation rate in the Board of Directors. It is further empowered to approve applications received for incorporation. Accordingly, it implies that some of the old law prerequisites shall still apply to certain classes of companies. The New Law provides that upon receiving a request from the Ministry, relevant Authority or the Competent Authority, such order can exclude any company from such list (in whole or part). Such exclusions would entail that such companies will not have to comply with UAE National's shareholding or board participation. For this, the excluded companies must be regulated by special legislation.
Moreover, the new law has also abolished Federal Law Number 19 of 2018 concerning Foreign Direct Investment, which entails that the general requirement for a UAE national as a majority shareholder has been removed with regards to Limited Liability Companies (LLCs).
The critical changes effectuated through the amendment concerning LLCs are enumerated as follows;
- One Person Company
As per Article 71(2) of the old law, an LLC could be constituted with a minimum of two shareholders and a maximum of fifty shareholders and permitted a single natural UAE national to incorporate an LLC without a second shareholder's requirement..
As an impactful change to this, the new law has removed the restriction mentioned above and now allows foreign investors, natural or juridical, to establish an LLC..
- Capital Increase or Decrease
The amendment creates a new possibility to increase capital on an emergency basis. Article 101 stipulates that a shareholder may seek a court order to prevent the company's liquidation or settle liabilities payable to third parties.
- In cases where a shareholder defaults in paying his share of the increase in the company's capital, the law now permits that any other shareholder can pay on behalf of the defaulting shareholder. Accordingly, the share allocation will favor the shareholder in equivalence to i) amounts he settled on his behalf and; ii) the amounts he paid on behalf of the defaulting shareholder.
Changes in the provisions associated with the Memorandum of Association (MOA)
- General meetings:
The new law has introduced several changes regarding the formalities that need to be followed to convene a general assembly of an LLC. As per Article 92(2), any Director or authorized Director who owns at least 10% of share capital in the company shall be entitled to call for a General Meeting. The threshold as per the old law for such a minority right was set at 25%.
- Dispute Resolution
Generally, an MOA constitutes all matters relating to incorporation, rights, and liabilities of directors, etc. However, Article 73(2) of the new law mandates that the MOA shall contain means for the settlement of disputes that arise between the company and any of its Directors or among their shareholders due to their company's business..
- Specific provisions relevant to Public Joint Stock Companies (PJSCs) have been made applicable to LLCs and the amendment..
- Disqualification of Directors
Under chapter 2 of the Companies Law, the directors may be disqualified from the company if they do not comply with the provisions of this law. The following includes the requirements that may disqualify the Director and impose penalties on them if not met. Under Article 158 of the Companies Law, the Director will be deemed as resigned if he or she is absent from the meeting(s) of the Board three (3) consecutive times, or five (5) periodic meetings within the period of the Board, without any excuse acceptable to the Board.
In line with the provisions contained in Article 162, new liabilities are imposed. These liabilities apply to the directors of the entity and also on the executive management. The said liabilities trigger in the event of a fraud, misuse or abuse of power, any violations of the law or privisions or the Articles of Association of a company. If a fault arises out of a decision passed by majority shareholder votes, the accountability lies with the shareholders who agreed to such decision.. Dissenting members shall not be held liable, contrarily, in case of a unanimous decision, then all members shall be held accountable..
- Appointment and re-appointment of Auditor
The duration for auditors' appointment has been increased from a period of three years to a period of six years with a requirement to re-appoint the chief auditor after the lapse of the first three years. The provision further allows for the re-appointment of the existing auditing company after the lapse of a period of two years..
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