Many schools, nurseries, colleges and universities in the UAE are structured using an “onshore” limited liability company (LLC) as an operating company. In addition to specific education regulations and the terms of their education licences, these operating companies are governed by the UAE Companies Law. This law was updated on 1 July 2015 when the new UAE Commercial Companies Law (Law No. 2 of 2015) (the New Law) came into force.
The managers/directors of any LLC that is incorporated "onshore" (i.e. not incorporated in any of the UAE free zones) in the UAE should start to consider what changes may need to be made to the LLC’s Agreement for Incorporation/Memorandum of Association (Memorandum) to bring it in line with the New Law. LLCs may also want to take advantage of a number of deregulatory changes in the New Law.
The grace period
Article 374 of the New Law allows existing companies a 12 month grace period in which they must "adjust their positions". This is taken to mean that an LLC will need to amend any conflicting provisions in its current Memorandum by 30 June 2016, unless that deadline is extended.
However, it is important to note that this grace period does not mean that LLCs do not need to comply with the New Law for a year. Where a new corporate action is to be taken which is not the subject matter of the LLC’s existing Memorandum, that action must be taken in compliance with the New Law. Therefore, from 1 July 2015, LLCs will need to implement important amendments, in practice, such as taking account of the new codified standards for directors and the new requirement to prepare audited accounts in accordance with International Accounting Standards.
Potential amendments to a Memorandum
There are two types of amendment which may be made to a Memorandum to reflect the New Law: changes which are mandatory under the New Law, and amendments which are desirable to make the operation of an LLC more efficient. We highlight a few of these below.
- Addresses: Under the New Law, the Memorandum should set out the address of the LLC’s head office and of any branch offices it has registered. Any additional branch offices that are registered and any change in the existing head office or branch office addresses will need to be reflected in an amendment to the Memorandum going forward, as an additional administrative requirement
- Pledges: The New Law envisages that the Memorandum will include information on the manner in which a share pledge may be created
- Manager dismissal: The New Law changes the way in which the manager of an LLC may be dismissed. Under the New Law, if the Memorandum is silent, the manager may be dismissed by an ordinary resolution at a general meeting. However, the LLC may specify its own requirements for dismissal in the Memorandum. This contrasts with the position under the 1984 Commercial Companies Law which provided that, if the Memorandum of Association was silent on the manager dismissal rights, unanimous shareholder approval was required. Alternatively, if the Memorandum allowed a manager to be dismissed, a special resolution was necessary. Going forward, LLCs may want to consider their manager dismissal rights, particularly if the Memorandum is silent. This may be important in an LLC in which the minority shareholder has made all of the investment and exercises day to day management of the LLC
- Quorum and voting: The basis on which the quorum and voting at general meetings is calculated has been amended under the New Law, both for ordinary resolutions and special resolutions. The relevant provisions in a Memorandum may need to be amended to ensure that they continue to provide the same level of voting control for the shareholders as currently exists, particularly those holding a minority of the shares
Other potential amendments
- Deregulation of notices: The New Law allows for notices of general meetings to be given in any way set out in the Memorandum. Therefore, it is open to a company to provide for notices to be given by way of electronic communication, as well as hard copy registered notices. This will significantly improve the efficiency of convening general meetings
- Shorter notice: The New Law permits shareholders to agree to shorter notice. Market practice will determine after the New Law is implemented whether it is possible to specify the shorter notice required in the Memorandum
The way forward
Directors/managers should also check that any other provisions of the Memorandum do not expressly contradict the New Law. Clyde & Co can assist with this review.
As with many new, important pieces of legislation, it may take some time for the whole impact of the New Law and its interpretation to be understood by the market and to be fully reflected in practice. However, managers/ directors are well advised to think about the changes which may need to be made, not only to the existing Memorandum, but also to the way in which they conduct their corporate affairs from now onwards.
Fixed Fee offering
Since the new law came into effect, we have been helping many of our clients to adapt their arrangements so that they comply. We would be delighted to also assist you in this respect. We are pleased to offer you the following services:
- to carry out a ‘high level’ review of the existing memorandum of association, any other documentation that has been (or is being) put in place with the UAE national shareholder that holds or will hold a majority interest in the company concerned and the existing overall company set-up and arrangements;
- to prepare and provide to you with a ‘mark up’ (in English) of the Memorandum of Association of the company under review showing the changes that are required to be made to that document by the new law; and
- a meeting to discuss the changes we suggest and the other documentation we have reviewed. If it is agreed, at that meeting, that changes should be made to that documentation, a fixed price can be provided for making those changes, once a scope of work has been agreed.