January 24, 2022
As part of the substantial legal reforms which were recently announced in the UAE, and to mark the occasion of the UAE’s 50th anniversary, the UAE President—His Highness Sheikh Khalifa Bin Zayed Al Nahyan—issued Federal Law No. 32 of 2021 regarding the Commercial Companies on 20 September 2021 (“New Companies Law”), which recently came into force on 2 January 2022.
The New Companies Law replaces, in its entirety, Federal Law No. 2 of 2015 regarding Commercial Companies, as amended by Federal Decree Law No. 26 of 2020 (issued on 20 September 2020 pursuant to which fifty-one (51) articles of the Existing Companies Law were amended) (“Old Companies Law”).
The New Companies Law aims to enhance the UAE’s competitiveness in the field of economic development and proves once again that international best practices are applied.
NEW CORPORATE ENTITIES INTRODUCED BY THE NEW COMPANIES LAW
The New Companies Law introduced the following new corporate vehicles:
KEY CHANGES INTRODUCED BY THE NEW COMPANIES LAW
A. LIMITED LIABILITY COMPANIES
General Assembly Meetings
Memorandum of Association
The Memorandum of Association must explicitly set out alternative dispute resolution methods to resolve any company business related disputes which may arise between the company and any of its shareholders, directors or managers.
Where a manager has not yet been replaced at the end of their term, such term may be extended by a maximum of six (6) months, pending the appointment of a new manager.
The statutory reserves, made up from net profits, have now been reduced from ten percent (10%) to five percent (5%); the New Companies Law provides that shareholders can stop this allocation if the legal reserve of fifty percent (50%) of the share capital is met.
Expiration of the Board of Managers’ Term
If the term of the Board of Managers expires, and a new Board of Managers is not appointed, the existing board will continue to manage the LLC for a period of six (6) months, following which a new board must be appointed by the LLC. If the LLC fails to do so, the Department of Economic Development can step in and appoint a board for a maximum of one (1) year, during which the LLC must appoint a new Board of Managers. Therefore, the appointment of the Board of Managers by the DED is a substitute arrangement that will be regularised if the LLC fails to appoint the board itself.
Appointment of the Supervisory Board
Where an LLC consists of more than fifteen (15) shareholders (previously seven (7)), they must appoint a Supervisory Board consisting of a minimum of three (3) shareholders to supervise the company’s annual reports, budgets distribution of profits and to also supervise the LLC management and submit a report to the General Assembly in this respect.
B. PUBLIC JOINT STOCK COMPANIES
Replacement of a Director
If the director departs prior to the expiry of their term, the board is entitled to appoint a replacement director within thirty (30) days, who shall be presented to the General Assembly in its first meeting to approve the appointment or to appoint another individual. If approved, the new director will complete the remaining term of the previous director. In case the Board defaults in appointing a director during the period provided, the Board must then convene an election to appoint a new director in the General Assembly’s first meeting, and the newly elected director shall hold the position for the remaining term of the predecessor.
This is limited to a maximum of ten percent (10%) of the net profits of the fiscal year (after depreciation and reserve deductions have taken place). In the event the company has not generated profits for that year, notwithstanding the company’s constitutional documents and approval of the General Assembly, a board member may be paid a lump sum fee not exceeding AED 200,000 at the end of the fiscal year.
Amendments to the Requirements for Contribution by the Founders
The New Companies Law has removed the minimum and maximum percentages of the capital to which the founders of a PJSC may subscribe to new shares upon public offering. Whereas, previously, the founders were required to subscribe to a minimum of 30% and a maximum of 70% prior to the invitation to the public subscription – instead, they may now subscribe to new shares up to the percentage specified in the prospectus and subject to the requirements of the SCA (whereas previously UAE Council of Ministers approval would be required for an exemption to the minimum 30% offering size).
Amendments to the Requirements for Conversion to a PJSC
The New Companies Law no longer requires a 10% net operational profits test within the two financial years preceding the application for conversion.
Sale of Part of the Shares of the PJSC upon its Conversion
The New Companies Law no longer sets a maximum limit on the percentage of shares that can be offered for sale upon conversion from a private joint stock company to a PJSC (the maximum limit on a sale of shares was set at 70% under the Old Companies Law). Now the percentage/ratio of sale shares and new shares being offered as part of an IPO on conversion is to be determined by the SCA.
Founders’ lock-up period in a PJSC
The New Companies Law has also removed the restrictions on founders of a PJSC from trading their shares once the converted company is listed.
Amendments to the Offering Subscription Period
Ability to Issue Discounted Shares
Subject to SCA approval and the passing of a special resolution, a PSJC is now permitted to issue shares at a discount in instances where the market price of the shares falls below the nominal value.
Nominal Value of Shares
A PJSC can now specify the value of its shares (thereby no longer restricted from being a minimum AED 1 and a maximum of AED 100). The nominal value of shares is now simply as set out in the Articles of Association.
Corporate Social Responsibility (CSR)
The New Companies Law allows newly established companies to provide CSR and to reserve any profits for such cause. This removes the limitation prescribed by the 2020 amendments that only allowed a PJSC to contribute to CSR if it had been established for at least two financial years with an upper limit contribution of two percent (2%) of the average profits for the last two financial years. Further, the New Companies Law mandates public disclosure on a company’s website even if it does not contribute to CSR, which was not required under the 2020 amendments.
C. DIVISION OF JOINT STOCK COMPANIES
The New Companies Law introduces the concept of dividing a joint stock company; such division can either be: (a) horizontal (i.e., where the same shareholders own directly the shares of the resulting company pro rata/similar to their shareholding in the parent company); or (b) vertical (i.e., where part of the assets or commercial activities of a company are carved out by setting up a subsidiary to acquire such carved assets or commercial activities, and such subsidiary is wholly owned by the company). With respect to the procedure for such division, the Board must prepare a “detailed division project” having necessary details as prescribed by the New Companies Law and present it to the General Assembly for its approval. Following such approval is obtained, a no objection from the SCA or the UAE Ministry of Economy (as applicable) must be obtained before the “detailed division project” can be implemented.
D. EFFECT OF NEW COMPANIES LAW TO THE RECENT AMENDMENTS (EFFECTIVE 1 JUNE 2021)
Effect of the New Companies Law to Article 10 (Foreign Ownership) that Allows One Hundred Percent (100%) Foreign Ownership of UAE Onshore Companies
Arguably, the 2020 amendments to the Old Companies Law, which attracted most interest from investors, was the modification of Article 10 of the Old Companies Law. This article required a UAE national, or an entity wholly owned by UAE nationals, to hold at least fifty-one percent (51%) of the share capital of each UAE company that is incorporated onshore in the UAE (this requirement did not apply to the economic free zones). Under the 2020 amendments, Article 10 had been amended to remove this requirement. Whilst the Old Companies Law will no longer be in effect from 2 January 2022, it is worth noting that Article 10 has remained unchanged under the New Companies Law. However, Article 10 states that the threshold required for UAE ownership (if any) should be determined by the Cabinet upon the recommendation of a committee, which is required to determine activities considered to have a ‘strategic impact’ in order for foreign investors to be entitled to hold up to one hundred percent (100%) of the legal interest in such companies.
A list of activities permitted for the purpose of one hundred percent (100%) foreign ownership has recently been published by each of the relevant Economic Departments in Abu Dhabi and Dubai. The UAE Cabinet is yet to issue a Resolution regarding the list of activities that would be considered to have a ‘strategic impact’.
The following key 2020 amendments have remained unchanged under the New Companies Law:
Exemptions to the New Companies Law
The entire issued share capital of an LLC may be held by a single non-UAE shareholder (subject to the above with respect to the relevant activities being considered of ‘strategic impact’).
A shareholder holding ten percent (10%) of the share capital of an LLC has the right to request a General Assembly to convene. Previously, the threshold was set at twenty-five percent (25%).
Foreign Company Branch
Branches of foreign companies are no longer required to appoint a national service agent.
The UAE Cabinet shall issue a decision confirming which provisions relating to joint stock companies will be applicable to LLCs taking into account the nature of an LLC.
A shareholder has a right to seek an urgent court order pursuant to which the other shareholders are required to fund an increase of capital to the extent necessary to prevent the liquidation of the company. If a shareholder fails to pay the capital amount required, its share in the company would be diluted accordingly.
E. COMPLIANCE WITH THE NEW COMPANIES LAW
Existing companies must adjust their position within one (1) year of the New Companies Law coming into force (subject to any further extension). Any companies failing to do so will be considered dissolved. The one (1) year deadline can be extended by a decision from the Council of Ministers.
Hunton Andrews Kurth LLP will continue to monitor further developments in this area and share our insights and experience as our clients navigate through the same. Please feel free to contact the authors, or your usual Hunton Andrews Kurth contact, for further information and assistance.