On 31 March 2015, the new Federal Law (No. 2 of 2015) concerning Commercial Companies (the NCCL) was issued and published in Federal Gazette No. 577 in the United Arab Emirates (the UAE) (the Official Gazette). The NCCL comes into effect three months from the date of its publication in the Official Gazette, i.e. on 1 July 2015.
While the NCCL replaces the previous UAE Federal Law No. 8 of 1984, as amended (the CCL), the NCCL largely maintains the existing framework and features of the CCL. In this alert, we outline the main changes that affect and apply to issuers of bonds and Sukuk and that issuers should be aware of when issuing bonds or Sukuk to the market.
Issuance of bonds or Sukuk
Who can issue bonds / Sukuk
The NCCL states that negotiable stocks, bonds or Sukuk may only be issued by a public or private joint stock company (Article 31 (Issuing Securities)). This requirement is subject to the provisions of Article 4 of the NCCL, which provides an exemption for specific companies, including, but not limited to, companies exempted by a resolution of the Cabinet of the Federal Government, companies wholly owned by the Federal Government or a local government, companies in which the Federal Government, local government or a government-related entity has a direct or indirect shareholding of at least 25 per cent and companies operating in fields relating to oil exploration or in industries relating to power generation, gas production or water desalination, transmission and distribution.
Preconditions of Issuance
Article 180 abolished
The requirement under Article 180 of the CCL that a company may not issue bonds (or Sukuk) if the value of (i) such bonds (or Sukuk) and (ii) all other debt securities of the company outstanding on the proposed issue date of such new bonds/Sukuk will exceed the company's existing capital as shown in its latest published consolidated financial statements (otherwise known as the "thin capitalisation rule") has been abolished. This will come as a relief to companies in the UAE, as this requirement has previously deterred some issuers from proceeding with their plans to issue bonds or Sukuk directly out of their UAE-based entities.
The requirement for a special resolution
However, the old requirement that the issuer should obtain the approval of its shareholders prior to issuance remains. Article 230 (Conditions to Issue Bonds or Sukuk) of the NCCL requires that bonds or Sukuk can be issued only pursuant to a special resolution by the general assembly of a company. It further provides that the general assembly may authorise the company's board of directors to determine a date to issue bonds or Sukuk, provided the date selected does not fall later than one year from the date of the shareholders' approval of the issuance.
For issuers with medium term note (MTN) or Sukuk programmes, the implication of this provision is that shareholder resolutions will need to be renewed on an annual basis if such issuers wish to continue to be able to issue under their programmes. Any authorisations previously issued in respect of issuances under existing MTN or Sukuk programmes prior to the effective date of the NCCL are likely to require renewal, regardless of whether or not such prior authorisations were expressed to remain valid for a longer period of time than the period of validity of the relevant programme. Further issuances under any MTN or Sukuk programmes going forward would require the approval of the general assembly annually.
From a practical perspective, issuers should seek to time the issuance of the "annual" shareholders' approval with the annual update of their programmes, in order to be able to utilise such programmes during the full length of their term. Alternatively, to the extent issuers do not wish or are not able to hold extraordinary general assembly meetings to pass such resolutions, they may wish to consider obtaining their shareholders' approval at their company's annual general assembly. We expect that further discussions will be had between market participants, and potentially the UAE Securities and Commodities Authority (the SCA), about how this provision should be applied in practice in the context of issuances under programmes.
Under the NCCL, there is also a requirement that any provisions relating to the early repayment (e.g. in connection with the exercise of a call or put option), or delayed repayment, of capital to investors be reflected in the offering document relating to the bond or Sukuk at issue and in the special resolution authorising the issuance. Offering documents already typically contain provisions relating to the dates of repayment of amounts due to investors and how such dates can be adjusted during the life of the bond or Sukuk (be it upon the occurrence of certain events or following an amendment to the terms of the bond or Sukuk). However, such provisions are not often detailed in the terms of special resolutions per se. Issuers are advised to draft their special resolutions in such a way that directors are given authority to agree on behalf of the relevant issuer early or late repayment terms (this will then be enshrined in the terms and conditions of the relevant instrument).
Under the NCCL, issuers will continue to be able to avail themselves of the flexibility of issuing bonds or Sukuk via offshore special purpose vehicles and thus avoid the need to comply with certain provisions of the NCCL. However, it should be noted that the SCA has not been in favour of this approach by issuers.
Unlawful financial assistance
The NCCL confirms that neither a company nor any of its subsidiaries may provide financial aid to any shareholders to enable a shareholder to hold any shares, bonds or Sukuk issued by the company. The NCCL defines financial aid as: (i) the provision of loans; (ii) the provision of gifts or donations; (iii) the provision of the company's assets as security; or (iv) the provision of any security or guarantee in respect of the obligations of another person (Article 222 (Financial Aid to Shareholders). This is a new requirement, which issuers should be aware of when issuing bonds or Sukuk to the market, particularly in circumstances where shareholders could be potential purchasers of the bonds or Sukuk.
Rights relating to bonds
The NCCL maintains the requirement under the CCL that a bond or Sakk will remain nominal in value until the payment of its value in full (Article 229 (Issuing Bonds or Sukuk)). The implication of this requirement is that the principal amount of such bonds or Sukuk may not be issued at a discount to face value.
Provisions relating to Convertible Bonds
Issuance. The NCCL authorises a company to issue negotiable bonds or Sukuk, but, unlike the CCL, the NCCL expressly provides that such bonds or Sukuk may be issued whether the bonds or Sukuk can be converted into shares of the company for equal value or not (Article 229 (Issuing Bonds or Sukuk)). This provision is essentially a recognition of the ability of companies to issue bonds convertible into their shares. The question remains as to whether issuers may issue bonds exchangeable into another entity's shares. Although this is not expressly addressed in the NCCL, there is no prohibition on the issuance of exchangeable bonds in the new law and therefore these instruments should continue to be available to companies as a financing tool.
Conversion right, not obligation. The previous requirement under the CCL that a holder of securities have a choice to either accept a conversion and receive the shares or opt to be paid the nominal value of the bonds or Sukuk (i.e. cash) has been retained under the NCCL (Article 229 (Issuing Bonds or Sukuk)). Therefore, the position under the CCL which prohibited the issuance of mandatory convertible securities is preserved.
SCA approval. Article 201 (Conversion of Sukuk or Bonds into Shares) formalises the requirement that the SCA's approval be obtained prior to the issuance of a convertible bond. The law states that bonds or Sukuk may be converted into shares, subject to the approval of the SCA thereby ensuring that the current market practice of obtaining the SCA's consent will continue. In respect of entities licensed by the Central Bank of the UAE, the conversion of bonds or Sukuk into shares will be subject to the approval of the Central Bank of the UAE as well.
Anti-dilution. Article 231 (Increase or Decrease of the Share Capital upon Issuing Bonds or Sukuk) of the NCCL stipulates that upon issuing a special resolution to issue bonds or Sukuk convertible into shares, and until the date of such conversion or payment of the value of the bonds or Sukuk to the holders, a company may not decrease its share capital or increase the dividends previously determined as payable to shareholders. It also provides that, if the share capital of a company decreases due to losses incurred as a result of the forfeiture of a number of shares or due to a decrease in the nominal value of the shares, the share capital of the company must be decreased as if the holders of the bonds were actually shareholders themselves. This statutory provision is designed to protect investors from certain dilutive actions which the company may take prior to conversion and adds to the usual protections holders are offered through the contractual terms of the convertible securities (particularly those dealing with conversion price adjustment).
Another provision, Article 232 (Profits of the Bonds or Sukuk upon their Conversion into Shares), seeksto protect investors' returns emanating from the conversion of their instrument into shares. The NCCL confirms that shares received by the holders of bonds or Sukuk will be entitled to a share of the profits that a company has resolved to distribute in respect of the fiscal year during which the conversion was exercised (the entitlement to such profits being calculated by reference to the period from the date of such conversion until the end of the fiscal year).
Pre-emption rights. Finally, under the NCCL, the provisions relating to pre-emption rights continue to apply to convertible bonds. Issuers will therefore need to continue to seek the SCA's informal approval to request that their existing shareholders waive such pre-emption rights prior to launching their convertible bond or Sukuk in order to ensure a smooth offering process.