During the last 12 months, we have seen each of KSA, Qatar and the UAE adopt new commercial companies laws. In this article, we compare and contrast these new laws and look at some of the key themes emerging across the three jurisdictions.
All three jurisdictions have taken steps to streamline the procedures relating is the establishment of companies and to include further flexibility in terms of corporate structuring. Highlights include.
– Single-member companies: each of the UAE and KSA now allow single member limited liability companies (LLCs) and joint stock companies (JSCs), subject to various conditions and restrictions. Qatar has also modernised its regime by replacing the former “Single Person Company” with a single member LLC.
– Holding companies: the concept of a holding company is now expressly recognised in each of the three jurisdictions, allowing for greater flexibility when structuring corporate groups. Holding companies are in all jurisdictions required to prepare consolidated financial statements.
– Removal of obsolete forms of company: for example, each of the UAE and KSA has removed the little-used concept of a “partnership limited by shares”. The UAE has also removed the unregistered “joint venture company” (muhassa) as legal company form, requiring investors in the country to adopt more transparent, registered corporate vehicles. In contrast, similar forms of unregistered company have been retained in both KSA and Qatar.
– Share capital: the minimum capital requirement for a JSC in KSA has been reduced from SAR 10 million for listed JSCs, and SAR 2 million for unlisted JSCs, to SAR 500,000. In Qatar, there is no longer any statutory minimum level of capital for LLCs – capital must instead be determined by the shareholders. However, these reductions contrast with the UAE, where minimum capital levels for JSCs have instead been increased (there has been no statutory minimum capital requirement for LLCs since 2009).
– Processes and procedures: a “one stop shop” system is to be introduced in Qatar to shorten and simplify company registration procedures. However, the time-frame for implementation of the new system is uncertain.
Due dilligence & accounts
Generally, there is an increased emphasis on transparency and making company information publicly available. In KSA, a JSC’s constitutional documents are to be published on the website of the Ministry of Commerce and Industry (MOCI) and will be available to the public, while in Qatar, companies are directed to make publications available on their websites if they have them, such as the publication of the memorandum and articles of association of public shareholding companies. The UAE envisages the creation of a new Companies Registrar and “concerned parties” will be able to request copies of documents filed with it. UAE JSCs are now required to publish their memorandum and articles on the company’s website.
There is also a more rigorous approach to company accounts and audit. In the UAE, there is a new requirement for all companies to prepare accounts in accordance with international accounting standards. There are new maximum limits on successive re-appointment of auditors of JSCs in each of the UAE and KSA, for three and five years, respectively. In KSA, LLCs now have three rather than four months from financial year-end to prepare their accounts and these must be filed with MOCI; in the case of a JSC, the financial statements must be signed by the chairman, the CEO and the CFO. In Qatar, the financial statements of public companies must now be made available to shareholders at least one week prior to the annual general assembly; previously the time period was three days.
All three jurisdictions have taken steps to enhance their regulations in the area of corporate governance, as demonstrated by the examples below.
– Directors must be appointed by cumulative voting (this prevents a majority shareholder from controlling the composition of the entire board by preventing votes being cast on each appointment as separate resolutions).
– The chairman of the board should not hold an executive position.
– There is a limit of SAR 500,000 on a director’s total remuneration.
– A director’s appointment may be terminated if he fails to attend three consecutive board meetings without good reason.
– The board must convene at least twice a year.
– The time limit for fraud claims against directors has been extended.
– An audit committee must be appointed to review and report on the company’s financial statements and internal controls.
– The limitation period for claims relating to the liability has been increased. The former limit was three years from discovery of the wrongful act. This has been increased to either five years from the date of the date of the end of the financial year when the act was committed or three years from the date of termination of the manager’s appointment, whichever comes later.
– Managers are now personally liable for the company’s debts if the “LLC” suffix is not used or capital of the company is not written beside its name – as such, the entity treated as an unlimited liability entity where its limited the liability status is not publicly evident.
– The Annual General Assembly must be convened within four months (rather than six months) following the end of the LLC’s financial year.
Public Shareholding Companies
–Directors must be appointed by cumulative voting.
– The basis on which directors’ remuneration is calculated has been reduced from 10% of adjusted net profit to 5%.
– Members of the board are now liable for “gross error” when undertaking their duties.
– Shareholders holding 20% of the share capital may now request the LLC’s managers to convene a General Assembly (formerly the threshold was 25%).
– The new liability standard for “gross error” also applies to LLC managers.
– New positive statement of the duties of those authorised to manage the company.
– Restriction on companies exempting officers (current and former) from liability.
– Introduction of ostensible (apparent) authority of directors/managers to protect third parties who deal with the company in good faith.
– Directors must be appointed by cumulative voting.
– Wider prohibition on loans to directors covering loans to their family members and companies in which they hold a significant interest.
– New provision to address unfair prejudice.
– New rules for related party transactions.
– Wider restrictions on the powers of the board.
– New prohibition on a PJSC or its subsidiaries providing financial assistance for the acquisition of shares, bonds or sukuk in the company.
– New provision on manager liability, including for “gross error”.
– New provision addressing manager conflicts of interest.
All three jurisdictions have made changes to facilitate capital markets transactions. For example:
- Non-pre-emptive share issues: such issues are now permitted in Qatar and the UAE with the approval of 75% of the shareholders; in the UAE, the issue must be made to a “strategic investor” who fulfils certain criteria.
- Share buy-backs and pledges: a JSC in KSA can buy back and pledge shares according to guidelines issued by MOCI/CMA. Previously there were various restrictions on such actions.
- Free float: in the UAE, there has been a reduction in the minimum free float for listed JSCs from 55% to 30%. This aims to encourage local companies to seek a listing, as the founders may now retain control over their businesses.
- Listing and trading process: in the UAE, offers for sale are now permitted and provisions permitting and facilitating book-building, underwriting and trading in nil-paid rights on a rights issue have been included (subject to further secondary regulation).
Across each of the three jurisdictions, we can see various themes emerging:
more streamline and flexible corporate set-up options
improved access to company information and more rigorous approach to corporate accounting
greater emphasis on corporate governance and directors' duties
facilitation of capital markets transactions
It is also interesting to note that the UAE, in particular, has also chosen to adopt some Western corporate law concepts such as the new prohibition on financial assistance and ostensible authority of directors. These are not, as yet, concepts which have been carried over to KSA and Qatar.
While it is too early to assess fully the impact that these developments will have in practice, the general trend towards modernising company law regimes is to be welcomed.