In December 2011, the Cabinet of the United Arab Emirates (UAE) Government moved a step closer to relaxing the current restrictions on non-UAE ownership of UAE companies. The restrictions currently in place in the UAE only permit foreign ownership of up to 49 percent of a UAE company, with foreign ownership in excess of this percentage limited to designated “free zones.” In practice this means every foreign investment is a joint venture with an Emirati partner, which can often be a step too far for financial investors or those unaccustomed to taking minority shareholder positions in new markets.
The UAE government has published an overview of a new federal (i.e., applicable to the entire UAE) commercial companies law that has been approved, although the actual text of the law itself is not yet publicly available. Expectations are high that the text will be published in early 2012, although the timetable for enactment is likely to be several months, given the multiple governmental (and Presidential) approvals required for enactment. It is expected that the new law, when enacted, will entirely replace the current 1984 Federal Commercial Companies Law.
The new law itself will not mandate an increase in the permitted level of foreign ownership, instead it grants the Cabinet the authority to determine the type of companies and activities where non- UAE nationals can hold in excess of 49 percent. No guidance has been provided as to which companies or activities may be affected by the changes, although previous announcements have suggested that up to 100 percent foreign ownership in certain industries may be permitted. Given the UAE’s focus on industries such as research and development, technology and clean tech, these are obvious potential target industries to benefit from the changes.
It is anticipated that the relaxations will apply to limited liability companies and private joint stock companies. Expanding the application to UAE listed public joint stock companies would potentially bring a double benefit to the UAE’s flagging stock markets in the form of attracting much needed capital and also increasing the likelihood of an upgrade to ‘emerging market’ status from their current ‘frontier ranking.’
Foreign ownership was not the only subject of the announcement, with many other welcome changes including: the exemption of certain government owned companies from the Commercial Companies Law; improvements to transparency of financial information and management of public companies; a new valuation mechanism for in-kind contributions; and the unification of accounting standards. The new law additionally restates the removal of minimum share capital requirements for limited liability companies. Although this has been in force since 2009, in practice, incorporations are governed at an Emirate rather than federal level, so appropriate levels of share capital are still being required.
The new law also appears to address the inability of UAE companies to dis-apply pre-emptive rights on the issue of new shares, a road block to numerous transaction structures common in other jurisdictions. The introduction of a disapplication mechanism (through shareholder vote) is a welcome change however it appears at this stage to be of limited application, focussing only on issues of shares to employee share schemes and in connection with the capitalization of debt. Other changes of note relate to permitting mortgages over shares in a limited liability company and removing the requirement for a branch or a representative office to appoint a national agent, which is now optional.
While all of these developments are of great interest, it is the relaxation of foreign ownership rules which will be most keenly awaited by the investment community and is likely to have the biggest impact on the UAE’s deal activity and competitiveness in the region. How the UAE will make such competitive changes when its friends and neighbours in the Gulf Cooperation Council (GCC) do not, also remains to be seen.
Looking around the GCC for examples of similar changes, the Kingdom of Saudi Arabia (KSA) is a notable jurisdiction where 100 percent foreign ownership is permitted, with the Saudi Arabia General Investment Authority specifying the industries in which this percentage is reduced and also specifying the actual percentage of non-KSA ownership permitted. The UAE however appears to be adopting the opposite approach, i.e., that majority foreign ownership is not permitted, except for specified industries.
There are multiple potential upsides for participants in the M&A market: international investors who have been put off taking a minority investment with an Emirati partner may look again at the UAE; private equity funds and other financial investors may have more exit opportunities; family conglomerates may have more choices for raising capital or solving succession issues and the likelihood of general consolidation is also increased. New and potentially cheaper capital may also bring with it enhanced governance and industry expertise, all of which will ultimately benefit the region.
Given the stagnation in the Eurozone M&A market and the perception of the UAE as being a safe haven in the Arab world, largely unaffected by the Arab spring, the proposed changes should be a significant boost for what is already the most attractive financial centre in the region.