In January this year the Board of Directors (Board) of the Abu Dhabi Global Market (ADGM) published initial drafts of various key regulations as part of a formal public consultation. Clyde & Co has engaged with ADGM to discuss these regulations and has submitted detailed comments on the regulations to the Board.
The draft regulations and consultation papers are available at http://www.adgm.com/setting-up-business/adgm- regulations/
In this article, we examine the draft companies regulations (the Regulations).
The Regulations are largely based on the UK Companies Act 2006 (UK Act) and replicate many of its provisions. There are, however, several significant departures from the UK Act, which aim to remove various historic peculiarities of the UK Act, better cater to local and regional markets and business objectives and enhance flexibility.
Overall, this approach provides a sensible framework. In particular, the absence of foreign ownership restrictions within ADGM should encourage business in and from ADGM on both a regional and global level. However, the interaction between the ADGM company law regime and the UAE onshore legal regime does need to be carefully analysed. For example, the ADGM does not have authority to create criminal laws and breach of the Regulations will instead result in fines – but what impact will an ADGM regulatory decision or fine have in relation to UAE federal criminal laws which may apply to the same conduct? Similarly, the Regulations include provisions on the ostensible authority of directors based on the UK Act – a concept that does not exist under UAE law. In practice, how will ADGM companies interact with entities onshore and will notaries be willing to notarise powers of attorney from ADGM companies for use in relation to certain onshore activities such as opening bank accounts and setting up LLCs and establishments? These issues will need to be addressed for ADGM to function seamlessly alongside the onshore regime.
Comparison with DIFC
Although similar in many respects to the Dubai International Financial Centre (DIFC), the proposed legal system in ADGM differs in several significant respects. In particular, the ADGM plans to adopt English common law directly rather than to take the relevant principles and codify them in the form of specific regulations as the DIFC has done (eg DIFC Law 6 of 2004, Contract Law).
In comparison with the DIFC Companies Law, the Regulations are much lengthier and more detailed. Some specific differences are highlighted below. The UK Act had not been implemented at the time that the DIFC Companies Law was written and the latter instead follows many of the principles set out in the now repealed UK Companies Act 1985. The DIFC therefore retains some concepts and concerns that were abolished or clarified in the UK in 2006. For example:
- The prohibition on ‘financial assistance’ by both public and private companies remains in the DIFC. This was abolished in respect of private companies in the UK and the ADGM has taken the same approach
- Following the English case of Aveling Barford v Perion (1989), there had been concerns and conflicting legal opinions
In the UK as to whether a company could sell an asset to a fellow group company at a book value which was less than market value if the transferring company did not have distributable reserves equivalent to the difference. Section 845 of the UK Act (mirrored in section 773 of the Regulations) removed the doubts created by that case by clarifying how the amount of a distribution in kind is to be calculated
In perhaps the most significant departure from the UK Act, the Regulations introduce a new class of private limited company, the ‘restricted scope company’ (RSC), subject to a reduced level of regulation and enhanced confidentiality.
As currently drafted, an RSC must be a subsidiary of a group which publicly files accounts or of a company formed by Emiri decree.
The Board proposes that RSCs will be used predominantly as ‘holding companies for professional investors’. It may encourage greater use of ADGM in this context if RSCs are not required to constitute subsidiaries, provided that the shareholders (whether individual or corporate) meet certain minimum net worth criteria and suitable safeguards against money laundering are in place.
The Board is considering whether to extend the RSC regime to include the single family office (SFO) concept, a move which could provide useful flexibility in the region.
Although the DIFC has an SFO regime, it does not have a general private holding company concept such as the RSC. The ability to establish such holding companies in ADGM may increase its attractiveness as a place through which to conduct business whether in the UAE or elsewhere.
The Regulations provide for protected cell companies and incorporated cell companies. A cell company is a single legal entity, within which there are a series of pools of assets and liabilities (cells). The cells are legally segregated from each other and also from the company itself. Claims by those transacting with a particular cell can be brought only against that cell. In an ‘incorporated’ cell company each cell has a separate legal identity, which can provide better protection against ‘non-cellular’ claims.
Cell companies were initially designed for use in the captive insurance industry but are now used more widely, in particular in the investment funds business and also recently as vehicles to structure a series of distinct private equity or real estate transactions. Cell companies are often established in ‘offshore’ jurisdictions such as Bermuda, Cayman and the BVI.
The UK Act does not contain provisions for cell companies (although the concept is recognised in legislation relating to UK open-ended investment companies). The provisions in the Regulations are based on relevant Jersey law.
The DIFC Companies Regulations contain provisions for protected cell companies but not incorporated cell companies.
These provisions create a convenient framework for structuring investment products. However, as drafted, a cell company cannot also be an RSC. A cell company structure is potentially a useful format for an SFO ie one cell per portfolio company to segregate the potential liabilities arising from a series of family businesses. If the RSC concept is extended to cover SFOs it may therefore be helpful to permit an SFO to establish itself as a cell company subject to the RSC regime.
In contrast to shares of UK companies, shares of ADGM companies will have no nominal/par value, thereby rendering the concept of ‘share premium’ redundant.
The par value of a share bears no relation to its market value and the concept is somewhat archaic. The capital maintenance rules, aimed at creditor protection, have always applied to the total consideration payable on shares issued and not just the nominal price received. There therefore seems little point in retaining the concept.
Nevertheless, the removal of a feature so long embedded in UK company law will undoubtedly have repercussions, both for the drafting of ADGM legislation and also for practitioners when drafting corporate documents. So, for example, preference share dividend rights are often drafted as a fixed rate per cent of the nominal value; any such rights in relation to an ADGM company would need to be framed instead as a fixed amount or as a percentage of the issue price.
Shares in DIFC companies can be denominated in either par or no par value.
Accounts and Audit
AGDM companies must typically prepare their accounts in accordance with international accounting standards. Independent regulatory oversight and guidance, such as that provided by the Financial Reporting Council (FRC) in the UK, is a critical element in the reliable implementation of any accounting standards. The Board will in due course decide whether it wishes to establish a similar body in the ADGM. In the interim, it may be helpful if ADGM companies and their advisers are permitted to rely on FRC guidelines and practice statements.
Certain private companies including ‘small companies’ benefit from exemptions in connection with the accounting and reporting requirements. Notably, RSCs are permitted to adopt the small companies regime regardless of their size and are not required to file accounts with the registrar. They are likewise exempt from audit. The audit exemption may not be appropriate to the extent the RSC regime is extended beyond subsidiaries consolidated into audited group accounts, eg to SFOs.
In the UK, a shareholder holding just a single share has standing to bring a statutory derivative action (ie an action on behalf of the company against a director for eg breach of duty). Concerns about shareholder activism prompted an amendment to the equivalent provisions of the Regulations, such that only a member holding ‘5% or more of the share capital of the company’ may bring such a claim. This is a reasonable approach, although the drafting needs to be clarified to explain how (eg by reference to voting rights?) and at what stage(s) this percentage threshold is calculated.
The DIFC Companies Law does not contain an equivalent provision permitting statutory derivative claims, although an action for ‘unfair prejudice’ is available to shareholders in similar terms to the provisions of both the UK Act and the Regulations.
Although not part of the UK Act, the Regulations include provisions for ‘continuance’ to allow companies to re- domicile both in and from ADGM. These are based on Jersey law. The DIFC also allows companies to transfer their incorporation both to and from the DIFC.
Provisions from the UK Act on schemes of arrangement, mergers and divisions have been adopted, with the following key differences:
- Schemes of ADGM companies require the approval of 75% of voting rights but not a majority in number of shareholders. The majority in number requirement in the UK enables activist shareholders to split their holdings between affiliates to help block the requisite shareholder resolution
- Mergers will be available to private and not just public companies
- Mergers will not involve the transfer of assets and liabilities or the ‘dissolution’ of one or more of the merging companies. Instead, a ‘universal succession’ concept is adopted, under which the ‘merged company’ is absorbed or consolidated with another company into a successor or surviving company. This is in line with a number of other jurisdictions including Jersey and the BVI
There are no provisions for schemes of arrangement or statutory mergers in the DIFC Companies Law.
The Regulations do not contain the statutory ‘squeeze-out’ provisions in Part 28 of the UK Act which allow and require a bidder holding 90% or more of the shares to acquire the remaining shares. The DIFC Companies Law contains similar provisions in Part 7 of Chapter 10. It is envisaged that separate Takeover Regulations will be issued by the Board in due course.