The New UAE Commercial Companies Law (Federal Law number 2 of 2015)
Although the primary objective of companies law is to safeguard interests of shareholders, modern/current day investment climate dictates that the legislation dealing with companies should:- i) serve the interests of business at large; ii) provides for simple and easy regulatory and compliance procedures; iii) keep pace with complexities of traditional and modern commercial dealings; iv) address issues governing insolvency, bankruptcy, securities and other essential elements; and v) provide continuity, certainty, and stability to the business community.
Dubai has been at the forefront of adapting to the economic demands of the United Arab Emirates and has continually shaped the laws accordingly. The Commercial Companies Law no. 2 of 2015 (the CCL) was published in the official gazette in the March 2015 edition and is to be implemented from 1 July 2015.
The primary objective of the CCL is to keep pace with the tremendous development in trade relations, economic openness and global variables as Article 2 of the law aims to contribute to the development of the business environment. The law endeavors to organize the capabilities and economic status of the companies in line with global variables particularly concerning corporate governance rules, protection of rights of shareholders and partners to ensure an influx of foreign investment in the region and promote social responsibility. The remainder of the law outlines the implementation of the law and the achievement of these objectives. This first article of three-part series discusses each of these key provisions with a particular focus on Limited Liability Companies- the effect and implication of the new law on both – existing as well as future entities and.
The scope of the application of the CCL applies to all commercial companies that are incorporated within the UAE, foreign companies including a branch of foreign companies and representative office(s). The new CCL sets out a clear explanation to its applicability and explicitly lists the kind of companies that are covered within its scope. While the old law did provide for the companies that were excluded from its scope the new law to some extent adds further explanation to the companies that qualify for these exemptions. For instance, the old law provided that all companies owned by federal or local governments or that are subsidiaries of government entities were exempt from the scope of the law.
The new law retains this provision but makes a sector-wise sub-division as follows:
In the event a company is involved in oil exploration, water desalination, transmission and distribution of energy as set out in their constituent documents, such companies should at least have 25% capital contribution by the federal government, local government or any of its subsidiaries or organs to qualify for such exemption.’
In addition to those mentioned above, the following companies are also exempted from the scope of the CCL:
a. companies for which a Ministerial Order or Cabinet Resolution has been passed are exempt.
b. companies which are exempt by virtue of special Federal Laws;
c. free zone companies. However, if such companies are permitted to conduct business activities outside such free zone; the new CCL will be applicable suo motu.
Interpretation of the law impinges on clearly defined terms that result in its ad rem applicability. The previous law only contained very few definitions of key words in the legislation. The new law includes extensive definitions and expressions, for instance, a definition of a careful person which is defined as “a person who has sufficient experience and commitment to duty in the performance of his work.”
The law defines a diligent person in Article 1 as a person having sufficient experience and commitment required in the performance of his work.
The law defines governance under Article 1 as a set of criteria, standards, and procedures that achieve corporate Governance at the management level of the company per the international standards.
The law defines a strategic partner in Article 1 as a partner whose contribution provides for technical, operational or marketing support to the company, for the good of the company
Transfer of Shares and Consideration
The law sets out agreed consideration for the transfer of shares under Article 80. Article 80 provides that a partner desiring to assign his/her share(s) to a third party (who is not a partner) with or without consideration should notify other partners through the manager of the company and set out terms of assignment or transfer. The manager is then required to notify the partners soon as he receives the notice.
Limited Liability Companies
The law defines a company in Article 8 as a contract through which two or more people participate in an economic project with the aim to make a profit, by providing a certain share of money or expertise; and sharing any profits and losses that arise from this project
. Article 71 defines a limited liability company as a company that has not less than two partners and not more than fifty. However, the new law has provided for an exception which allows a UAE national or juridical person to incorporate a single person limited liability company. The liability of this company will be limited to the capital contribution. This addition will present itself as a negation to the concept of a company.
The law has retained the requirement of 51% shareholding to be held by a local in a limited liability company, there have been significant and fundamental changes that have been incorporated pertaining to certain issues relating to establishing a limited liability company. The law has now requested The Council of Ministers to issue a decree to determine the minimum share capital of the company which was not a requirement under the old law. We must note that the scope and concept behind the draft Anti Fronting Law has been impressed upon in the new CCL under Article 10(iii) which classify any waivers of shareholding from the UAE national to other shareholders as a breach of the law and it will stand null and void.
The law has integrated this within its scope to extend the UAE nationals’ shareholding rights. In the past, the Dubai Court of Cassation has ruled that by virtue of shareholders’ agreeing to an assignment of the shareholding percentage, such assignment if being contradictory to the mandatory percentage of the shareholding under CCL; would deem the company illegal. However, the court held that although the form of the company was illegal due to it being in contravention of CCL guidelines, the actual dealing between the partners were real and the foreign shareholder had the right to claim any loss or profit on account of above decision from the local partner- who had in fact agreed to sign such assignment willingly. Any claims against the company would be unjustified.
It would have been a welcome step if the amended law would have taken into consideration the above decision instead of allowing the local shareholder a statutory right to claim shares in a company that he is not involved in.
Article 80 of the CCL deals with the shareholders’ rights relating to the transfer of shares. It also stipulates that if one of the partners desires to waive its share of people from non-partners in the company - with or without compensation - it shall notify the other partners through the company’s director along with the details of the assignee or buyer and the conditions of the sale. The director must notify the partners as soon as he receives the notification. Although the regulating provisions remain the same, a distinct hiatus from this has been that if one or more shareholder’s wish to exercise their pre-emption rights, and the valuation of the shares is in dispute, the disposer shall appoint a technical expert or competent authority for the valuation of these shares as opposed to the previous requirement of employing the services of the company’s auditor. The regulating provisions remain the same as per the above save that if a shareholder or a partner desires to dispose of his shares to people who are not shareholders and/or partners in the company-with or without compensation; the partner who is withdrawing out of the partnership has the right to choose a competent authority at the request of the applicant at his/her own expense. subject of share choose the competent authority at the request of the recovery by the applicant at his own expense, and that if used right of redemption more than one partner split shares or share sold them by the share of each of them in the capital, and that if the elapsed period referred to without using One of the partners the right of redemption, the partner will be free to dispose of his share.
Since the shares of the company are considered to be its fortune, the law authorizes the disposal of the shares as the company deems fit and involving itself in actions such as assignment, mortgage as long as it is done in accordance with the Memorandum of Association. The pledge of the shares should be recorded in official documents, notarized and registered with the authorities. Such a pledge only becomes enforceable against third parties after the date of the pledge being registered. The shareholders have rights over the pledging of their percentage of shares and this right is unrestricted as long as it is compliant with the company’s constitutive documents or against the provisions of the CCL.
The new Law allows the creation a pledge over the shares of a Limited Liability Company and also allows for the pledge to be registered in the Commercial Register. This will facilitate a company to avail better financing options such as mortgages. The old law was silent on the concept of Limited Liability Companies’ pledging shares though it was a possibility; there was a considerable risk involved.
Rights and Removal of the Manager
The CCL stipulates that a company can have more than one manager . The appointment of the manager can be done from within the shareholders or from outside the scope of the shareholding structure. If the Memorandum of Association does not specify the appointment of the manager, the shareholders have the right to appoint someone via a separate agreement. If the Memorandum of Association and the shareholders are quiet on the appointment of the manager, the General Assembly has the right to appoint the same
Pursuant to the old law, the manager of the company remains liable for any company’s actions against any third parties. The rights of the manager remain the same as the old law.
Article 85 of the CCL deals with the removal of the manager. The manager may be removed in the following ways:
i) by decision of the General Assembly; ii) by an order of the Court upon request for the shareholder/s upon production of a legitimate reason for the removal;
The new CCL also provides for a manager to submit his resignation to the General Assembly that must advise the relevant authority. It is required that the General Assembly submit its decision for the acceptance of resignation within 30 days of receiving the notification from the manager. If no decision is reached upon after the expiration of the thirty days, the resignation is deemed accepted
Article 92 of the New CCL retains provisions for the annual General Assembly Meeting, to be held at the invitation of the Director or the Board of Directors- at least once a year- within a period of four months immediately following the last fiscal year. The extra-ordinary general meeting can be called by the any of the partners representing at least 25 percent of the capital.
The matters for consideration in the annual General Assembly Meeting are set out under Article 94 of the New CCL and stated below:
1. Manager’s report on the company’s financial position during the financial year, auditor’s report and the report of the Supervisory Board.
2. Balance sheet, profit and loss account and ratification.
3. Profits that are distributed to the partners.
4. Hiring managers and determine their remuneration.
5. The appointment of members of the Board of Directors (if any).
6. Appointment of members of the Supervisory Board (if any).
7. Appointment of members of the supervisory committee and non executive members if the company operates in accordance with the provisions of Islamic Sharia.
8. The appointment of one or more accounts auditor and determine their remuneration.
9. Other matters that fall within its jurisdiction under the provisions of this Act or the provisions of the Memorandum of Association.
In Article 93, the new law has retained the key provisions with regards to General Assembly and Annual General Assembly meetings. The new law has paved the way for employing different methods of communiqué in relation to the method employed for the same. In the past, it was essential to use registered mail to send invitations for meetings, communication and such twenty one (21) days prior to a meeting. The new CCL allows for the use of modern technology and permits the shareholders to decide the mode of communication for invites to meetings. The use of modern technology means that the notification period has been reduced to fifteen (15) days.
The new CCL in Article 96 has changed the quorum requirements for the shareholders’ meetings. In the old law, it was required that shareholders holding fifty percent (50%) of the share capital had to be present for the meeting to reach a quorum; the new CCL has raised this to seventy five percent (75%). If a quorum cannot be reached in the first meeting, the next meeting is to be scheduled within fourteen days and should be attended by shareholders with a stake of at least fifty percent (50%); the third meeting should be scheduled within thirty days of the second meeting and should be attended by at least one shareholder.
The New CCL is only one of several significant legislative changes that have been eagerly awaited by the UAE business and professional community in recent years. There are no major changes that current operating companies need to comply with or any deadlines to be met. It is hoped that efforts to diversify the UAE economy by encouraging increased entrepreneurship and foreign investment.
This article is also available in Arabic