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 (hereinafter referred to as “new law”). The introduction of this amendment has effectuated an overhaul of the corporate landscape of the country. The new law has made several changes in its provisions, but the most notable difference is the removal of restrictions regarding the existence of a UAE national as a majority shareholder.
The new law affords foreign shareholders an opportunity to acquire full ownership in onshore companies thereby rescinding the general requirement imposed under Article 10 of the old law wherein fifty- one per cent (51%) of shares of a company established onshore were mandatorily required to be held by a UAE national.
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. The Competent Authority under the Department of Economic Development, established through Article 10(2) shall be authorized to determine shareholding percentages of UAE nationals, their percentage of participation in the Board of Directors in such companies and approve the companies’ incorporation applications thereby implying that the some of the prerequisites of the old law shall still apply to certain classes of companies, as per the discretion of the Competent Authority. However, upon request from the Ministry, relevant authority or the Competent Authority, any company can be excluded from this list, wholly or partly, from complying with any provision or condition that are concerned with the UAE national’s shareholding or their participation in the board of directors, provided that their activities are 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 the requirement of a second shareholder.
As an impactful change to this, the new law has now removed the aforementioned restriction and now allows foreign investors, natural or juridical, to establish an LLC.
- Capital increase or decrease
The amendment creates a new possibility for the purpose of increasing capital on an emergency basis. Article 101 stipulates that a shareholder may seek a court order for the purpose of preventing the liquidation of the company or in order to settle liabilities payable to third parties.
In case a shareholder defaults in paying his share of the increase in the capital, any other shareholder is permitted to pay on his behalf. Therefore, the number of shares shall be allocated to such a shareholder in equivalence to the amounts he paid on his own behalf as well as the amounts 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 for the purpose of convening 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%.
Further, Article 93 (1) of the new law extends the timeframe for the invitation to a general assembly from a period of 15 days to 21 days. The provision also allows the use of modern technology for the purpose of sending out the invitation, in addition to registered letters, as may be provided for in the MOA. A copy of the same is also to be sent to the Competent Authority prior to sending the same to the shareholders.
As regards quorum of the general meeting and voting decisions, Article 96 (2) of the new law rescinds the majority Emirati participation. The quorum for constituting a general meeting has been reduced from 75% to 50% unless the MOA specifies otherwise. In case a meeting is adjourned, a fresh invitation shall be sent to for a second meeting, and the same shall be held after five days and not later than 15 days of sending out such invitations (Article 96(3) of the new law).
- 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 settlement of disputes that arise between the company and any of its Directors or among their shareholders as a result of their company’s business.
- Specific provisions relevant to Public Joint Stock Companies (PJSCs) have been made applicable to LLCs as well, as per the amendment.
- Disqualification of Directors
Under chapter 2 of the Companies Law, the directors, if they do not comply with the provisions of this law, may be disqualified from the company. The following includes the provisions which, if not met, may disqualify the Director and can impose penalties on them. 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) intermittent meetings within the period of the Board, without any excuse acceptable to the Board.
Article 162 of the new law imposes a liability, not only on the directors but also on the executive management in case of fraud, misuse of power and any violation of the provisions of the law or the Articles of Association of the company. In case of a fault arising out of a decision passed owing to majority shareholder votes, accountability lies with the shareholders that assented to the decision. Dissenting members shall not be held liable, contrarily, in case of unanimous decision, the all member shall be held liable.
- Appointment and re-appointment of Auditor
The duration for the appointment of auditors 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 re-appointment of the existing auditing company after the lapse of a period of two years.
Introduction of the new law is a significant step towards relaxation of the corporate climate in the country and is expected to improve the economy and consequently attract a sea of foreign investors, making UAE an attractive investment hub.
The provisions concerned with foreign ownership come into force six months from the date of issue, of the new law. Companies falling under the ambit of this law are required to comply with the provisions of the law and get their affairs in compliance thereof within one year from the effective date, i.e. 2nd January 2021. For the purpose of complying with the provisions of the new law, it is highly recommended that companies review their Memorandum of Association and carry out such requisite changes as mention in the new law.
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