Further to our client alert "Amendments to the Commercial Companies Law of 2015", the Commercial Companies Law of 2015 has been significantly amended pursuant to Decree No. 26 of 2020 (the "Amended CCL"), and this client alert provides an overview of some of the main amendments.
When does the Amended CCL come into force?
The majority of amendments came into force as of 2 January 2021. However, three key changes will come into force 6 months after the date of publication of the Amended CCL in the Official Gazette; namely:
- the amendment to article 10, which requires that a UAE national owns majority shares in the UAE onshore companies;
- the amendment to article 151, which requires that a UAE joint stock company shall have an Emirati chairman and the majority of the board shall also be comprised of Emirati nationals; and
- the cancellation of article 329, which mandates a UAE national or a UAE owned company to act as an agent for branches of foreign companies.
Ease for Foreign Investors
Article 10 – There is no longer a requirement for the UAE onshore companies to have a UAE national or a GCC national as a majority shareholder. However, the amendment does not provide foreign investors with absolute freedom to form 100% foreign owned onshore companies in the UAE, instead article 10 calls for the formation of a committee, which will provide recommendations to the UAE Cabinet on the types of activities that are of "strategic" importance, and companies conducting such activities may still require local/GCC shareholding.
Based on the suggestions of the committee, the UAE Cabinet shall issue a resolution:
- listing "strategic" activities that will still require the involvement of a UAE/GCC national or a UAE/GCC owned company; and
- the licensing requirements for companies that carry out the strategic activities.
Subject to the powers of the UAE Cabinet and the requirements set out in the resolution, the relevant licensing authority shall:
- determine the level of shareholding interest to be held by the UAE/GCC nationals/corporates in companies carrying out "strategic" activities;
- determine the percentage of UAE/GCC nationals required to be on the board of directors of companies carrying out "strategic" activities; and
- approve the applications and fees for the incorporation of companies carrying out "strategic" activities.
It is possible that certain activities may only be conducted by the UAE nationals.
Article 151 – While the majority of the board of directors do not need to be UAE nationals anymore, the Amended CCL requires the composition of the board of directors to be in accordance with requirements issued by the UAE Cabinet or the relevant licensing authority.
Article 329 – Another fundamental change introduced by the Amended CCL is that foreign entities will no longer require the involvement of a local agent for establishing UAE onshore branches.
In addition the Amended CCL has also repealed the Federal Decree-Law No. 19/2019 concerning Direct Foreign Investment in its entirety.
Although the clear intention behind these changes is to increase the ease with which foreign investors can invest in the UAE, it remains to be seen how such changes will be implemented.
Amendments relating to Limited Liability Companies (LLCs)
Dispute Settlement – In accordance with article 73 it is now mandatory for the memorandum of association of a LLC (MoA) to contain provisions providing the means for settling disputes between the company and its managers or disputes that may arise between the shareholders.
General Assemblies – With respect to the general assemblies of a LLC some of the changes include:
- shareholders holding at least 10% share capital can now request for a general assembly (previously it was 25%);
- the invitation for the general assembly must be given 21 days prior to scheduled date (previously it was 15 days);
- a copy of the invitation needs to be filed with the relevant authority;
- shareholders may attend meetings remotely through electronic means;
- unless a higher percentage is provided in the MoA, a valid quorum for a general assembly is shareholders holding 50% of the share capital (reduced from 75%). If quorum is not achieved in the first meeting, a second meeting will be held within 5-15 days of the date of the first meeting and there is no requisite quorum for the second meeting unless the MoA provides for it.
Capital Increase – While the capital of a company cannot be increased (or decreased) without the consent of shareholders holding 75% of the shares represented at a general assembly, the Amended CCL has introduced an exception. It is possible for any shareholder to turn to the court and request a summary judgement to increase the capital of a company if:
- such capital increase is necessary to either prevent its liquidation or for settling third party liabilities; and
- the company does not have sufficient funds to pay off third party liabilities and hasn't achieved the requisite quorum for capital increase.
Related Party Transactions – Previously the disclosure of related party transactions has been limited to transactions involving directors and joint stock companies (JSCs). However, the Amended CCL states that UAE Cabinet will pass a resolution (upon the proposal of the Minister of Commerce) covering related party transactions undertaken by LLCs.
Amendments relating to Joint Stock Companies
JSC losses – If the losses of a JSC are more than 50% of its share capital, the directors now have 30 days (previously it was 21) to call for a general assembly. The time starts running from when either the Securities and Commodities Authority (SCA) or the Ministry of Commerce are provided with the financial statements of the company.
The Amended CCL has also placed additional responsibility on the board of directors other than calling for a general assembly. If the board intends to recommend to the shareholders in the general assembly:
- For the company to continue operations then a restructuring plan and the auditor's report needs to be provided to the shareholders along with the invitation to the general assembly. The restructuring plan should include a feasibility study, a debt management plan as well as the proposed implementation of the restructuring plan
The board of directors must send a report to the SCA every 3 months showing the results of implementing the restructuring plan and the extent to which the implementation schedule has been followed. Subject to the SCA's approval the board of directors may appoint a financial consultant to assist it in the preparation and implementation of the restructuring plan. The SCA can remove the financial consultant if it deems that the consultant is failing to do his job. - To wind up and liquidate the company then they must provide with the invitation to the general assembly, the auditor's report and a liquidation plan along with the schedule thereof approved by the board of directors and the financial consultant. The directors shall also nominate one or more liquidators approved by the SCA.
IPOs – The Amended CCL has introduced the following key amendments for companies wishing to list:
- companies can sell up to 70% of their shares to the public (this percentage can be increased further upon obtaining the approval of the SCA);
- the lock-up period for the founding shareholders is now 6 months (previously it was 2 years);
- liability for the accuracy of statements and information in a prospectus is now limited to the founding shareholders and the board of directors. Therefore, third party consultants and advisors can no longer be held liable for the accuracy of a prospectus but will still have to exercise care and diligence in performing their work.
Strategic investors – The Amended CCL has removed the requirements previously necessary for strategic investors to be able to come in and invest in public JSCs. The strategic investor no longer needs to be carrying on a similar or complementary activity to the company and does not need to provide two years of financial statements.
General Assemblies – With respect to the general assemblies of a JSC some of the changes include:
- shareholders holding at least 10% share capital can now request for a general assembly (previously it was 20%). The invitation for such a meeting must be given within 5 days from the request and shall be held no later than 30 days from the date of the invitation;
- the invitation for the general assembly must be given 21 days prior to scheduled date (previously it was 15 days);
- a copy of the invitation needs to be filed with the relevant authority;
- shareholders may attend meetings remotely through technological means;
- shareholders holding at least 5% (previously it was 10%) of the share capital can now add items to the general assembly meeting's agenda.
Board of Directors
Composition – In addition to the amendments made to article 151 as highlighted above, there is no longer a restriction on the number of experienced directors (who do not represent shareholders) that can be appointed on a board.
Related Party Transactions – The Amended CCL is now aligned with the SCA's Corporate Governance Regulations. In particular, before concluding a related party transaction, the director involved in such a transaction must provide the following information to the board of directors:
- the nature of the transaction and its terms;
- all the necessary information about his shareholding or interests in the two companies that are parties to the transaction; and
- the extent of his benefit from such transaction.
The chairman of the board of directors needs to provide the SCA with a statement disclosing all the details mentioned above and the SCA has the power to request further information or documents. Furthermore, the chairman also needs to provide the SCA with written confirmation that the terms of the transaction are fair, reasonable and beneficial to the company's shareholders.
Financial Assistance Exemptions – The Amended CCL has provided two exemptions to the rule prohibiting companies from providing financial assistance to persons wishing to hold shares issued by the companies.
The first exemption permits companies to provide guarantees or undertakings to underwriters in the context of an IPO.
The second exemption is for companies licensed by the UAE Central Bank. Such companies can provide loans to any persons to enable them to hold shares in the companies as long as any financial assistance provided is (i) on non-preferential terms; and (ii) in accordance with the general rules and regulations of the UAE Central Bank.
Exemption to Director Loans – Despite there being a general prohibition on JSCs providing loans to any directors, this prohibition now does not apply to financial institutions under the supervision of the UAE Central Bank.
Executive Management
Under the Amended CCL in addition to the board of directors the "Executive Management" of the company are also liable to the company, the shareholders and third parties for any the acts of fraud, misuse of power, and violation of the provisions of the law or the constitutional documents of the company.
Executive management is broadly defined to include the general manager, the CEO, an executive director, the deputies of the preceding, or anyone occupying an executive level position or has been appointed by the board of directors. Given the wide definition, it appears there is a clear intention to hold senior management of a company accountable for any serious offences.
If any member of the board of directors or the executive management is convicted (in a final judgement) for committing any fraudulent act or abusing his power or of concluding transactions or dealings involving conflict of interests in violation of the provisions of the Amended CCL, such person shall be removed from their position "by force of law". In addition, such an individual is barred from becoming a board member of any JSC within the UAE or taking on any executive management role in a UAE company for a period of three years from the time he was removed from his previous position.
Miscellaneous
Appointment of Auditors – A company can now appoint auditors (on a yearly basis) for 6 consecutive years provided that the lead partner for the audit is changed after 3 years. The same auditors can be re-appointed after the lapse of 2 years from the end of its appointment.
Investment management – The restriction that only JSCs can carry out investment management activities has been removed opening up the doors for such activities to be carried out by LLCs.
Next Steps
MoA Amendment – The Amended CCL provides a grace period of one year to all companies to amend their MoAs in accordance with the changes stipulated by the law. If a company has not updated its constitutional documents by 2 January 2022 and the UAE Cabinet does not extend the grace period, the company may be "deemed" dissolved by operation of law.
Consequently, companies need to undertake a review of their MoAs and start working towards making amendments relating to dispute resolution and holding of general assemblies (amongst others) to ensure that their constitutional documents are aligned with the Amended CCL and amended before the end of the grace period.
Agreements with Agent – Although the provision relating to the cancellation of a local agent has not yet come into force, foreign investors who have agreements with local agents should review their agreements with a view to exiting from such agreements within 6 months time.
Shareholding in Onshore Companies – It remains to be seen what activities will be included in the UAE Cabinet's resolution. It may take another 4-6 months before there is any clarity on this issue.
For further details please contact any of our lawyers below.
This Client Alert provides a very brief summary of a change in law. It does not constitute legal advice and should not be used as a substitute for competent legal advice from counsel.
