With effect from 12 November 2018 (the “Implementation Date”) the Dubai International Financial Centre (the “DIFC”) introduced the eagerly anticipated new companies law regime which replaces the previous DIFC Companies Law (Law No. 2 of 2009) and applies to all entities registered in the DIFC and those new entities to be incorporated within the DIFC. The revised regime comprises the below laws and regulations and among other considerations, seeks to afford small and medium sized private companies in the DIFC with increased flexibility as to their governance:
- DIFC Companies Law (Law No. 5 of 2018) (the “New DIFC Companies Law”);
- Companies Regulations;
- Operating Regulations;
- Operating Law (Law No. 7 of 2018); and
- Ultimate Beneficial Owner (“UBO”) Regulations,
(together, the “New DIFC Companies Regime”).
This article briefly summaries the main changes implemented by the New DIFC Companies Regime which may warrant due consideration by existing companies established in the DIFC and those entities looking to set up within the DIFC.
New types of legal entities
The New DIFC Companies Law no longer recognises limited liability companies (“LLCs”) but instead recognises the following three types of legal entity: (i) private companies (which must have “limited” or “ltd” as a suffix to the company name); (ii) public companies (which must have “public limited company” or “plc” as a suffix to the company name); and (iii) recognised companies (which continue to exist, for example, branches of foreign companies). The effect of this change was three-fold: (i) all existing LLCs were automatically converted to private companies; (ii) companies limited by shares which were publically listed or had more than 50 shareholders were automatically converted to public companies; and (iii) all other companies limited by shares were automatically converted to private companies.
Under the New DIFC Companies Law, there is no longer a minimum share capital requirement for a private company (previously there was a minimum requirement of US$50,000), in addition, the requirement for shares of a private company limited by shares to be fully paid up on issue has been removed.
Public companies, however, are still required to maintain a minimum issued and allotted share capital of US$100,000 and cannot allot shares unless they are paid up at least as to 25% of value (except in the case of shares allotted under an employee share scheme).
The New DIFC Companies Law also introduces the concept of treasury shares, which were not mentioned in the previous companies law. Now a DIFC company may hold treasury shares as part of its share capital if approved by ordinary resolution and not restricted by it articles of association. For example, a company may now buy back previously issued shares from existing shareholders and hold them as treasury shares rather than cancelling them or may issue treasury shares to be allotted at a future time.
Directors’ and Officers
Private companies may now be managed by only one director (previously there was a minimum requirement for two directors) and there is no longer a requirement for a company secretary to be appointed.
In addition, the New DIFC Companies Law provides for a more extensive set of duties to be applied to directors of DIFC companies which more closely follow those duties imposed by the UK Companies Act 2006. The previously existing duties to exercise reasonable care, skill and diligence and to declare interests in existing or proposed transactions have been expanded on and new statutory duties include the directors being obliged to act within their powers, to promote the success of the company, to exercise independent judgement as well as to avoid conflicts of interest. Directors will need to be brought up to speed on the expanded duties and their implications.
The requirement for private companies to hold annual general meetings has been removed, unless such meetings are expressly required under the relevant company’s articles of association. The notice period for calling general meetings (other than an annual general meeting of a public company or an adjourned such meeting) has been reduced from 21 days’ notice to 14 days’ written notice (this may be further reduced with the required level of shareholder consent). However, 21 calendar days’ written notice is still required for annual general meetings of public companies.
Shareholders’ written resolutions
Under the previous DIFC companies law, all written resolutions of the shareholders (both ordinary and special) needed to have been signed by all the shareholders who would have been entitled to vote in order to be passed. However, under the New DIFC Companies law, written resolutions now need only be signed by a majority of shareholders entitled to vote in the case of an ordinary resolution, or shareholders representing at least 75% of the total voting rights in the case of a special resolution. This will make written resolutions an even more effective tool for quick decision making and avoiding the administrative burden and timetable implications of calling general meetings to pass resolutions.
New standard articles of association
New standard template articles of association have also been introduced to reflect the provisions of the New DIFC Companies Law. Existing companies are not required to replace their current articles to the extent that they do not conflict with any new provisions of the law but have a period of 12 months from the Implementation Date to update those provisions which may conflict.
Incorporators continue to have the option to establish a company with bespoke articles of association rather than the DIFC standard articles (either in part or in whole), however, to do so the incorporators must file a statement with the DIFC Registrar of Companies confirming that any such non-standard articles comply with the New DIFC Companies Law and any other applicable DIFC laws. A similar statement is required to be made by a director on any amendment to the articles of association. This replaces the requirement under the previous version of the law for a legal opinion from the company’s legal advisors as to compliance. In practice, incorporators and directors may still require a legal opinion as to compliance from their legal advisors to give them assurance prior to making any such confirmatory statement to the DIFC.
The New DIFC Companies Law introduces statutory pre-emption rights in favour of existing shareholders of DIFC registered companies on any issue of new shares (subject to certain usual carve outs for example relating to the issue of new shares as part of employee share schemes or bonus plans), previously statutory pre-emption rights which were not previously provided for in the law. These rights will protect existing shareholders from being diluted by requiring new share issues to be offered first to existing shareholders before being offered to third parties. Private companies can, however, choose to dis-apply the new pre-emption rights in their articles of association. Shareholders of private and public companies can vary or exclude these provisions by special resolution.
The New DIFC Companies Law also introduces a new requirement for companies which have issued debentures to create and maintain a register of debenture holders. This register of debenture holders must be kept with its shareholders’ register at its registered office or such other location in accordance with the DIFC Operating Law (see below).
Previously all DIFC companies were required to prepare audited accounts which also needed to be laid before the shareholders’ annual general meeting, along with the auditor’s report, for consideration and approval and then filed with the DIFC Registrar of Companies. The New DIFC Companies Law introduces a carve-out from the annual accounts audit and filing requirements for small private companies with an annual turnover of less than US$5,000,000 and with no more than 20 shareholders during that whole financial year (and the previous financial year if the company has been operating for more than one year). Directors should be aware that, even when relying on this exemption, they are still obliged to produce annual financial accounts on an unaudited basis in accordance with the requirements of the New DIFC Companies Law and, for any given financial year, shareholders holding at least 10% of the share capital may be written notice require the relevant company to obtain an audit for its accounts of that financial year.
Annual filing obligations and registers and records
Under the updated Operating Law, instead of submitting an annual return each year, all DIFC registered companies are now required to submit a confirmation statement with the DIFC Registrar of Companies as part of their annual licence renewal process. Separately, the company’s registers and records may be stored at a location other than its registered office of the company (e.g. a corporate service providers offices) subject to notification to the DIFC Registrar of Companies.
As part of the New DIFC Companies Regime, the DIFC also enacted the UBO Regulations which also came into force on the Implementation Date. The UBO Regulations require all DIFC companies (other than public companies listed on a recognised stock exchange) to maintain an accurate and up to date register of all of their ultimate beneficial owners (being natural persons and not corporate entities who own or control (directly or indirectly) at least 25% of the company) and to notify the DIFC of any changes in such UBOs.
The UBO Regulations also require the maintenance of a register of nominee directors and notification of nominee directors to the DIFC Registrar of Companies within 30 days of their appointment or incorporation of the company (or by the deadline for compliance with the UBO Regulations for existing companies).
These UBO and nominee director registers are not publically available but must be filed with the DIFC Registrar of Companies and such filings kept updated. The extended deadline for compliance with the UBO regulations requirements was 14 March 2019. Therefore, any DIFC company that has not yet filed a UBO register (or a nominee director register where it has such director(s) in place) with the DIFC Registrar of Companies may be liable to a fine (individual nominee directors may also be liable to a fine for not notifying their details).
Please see the CMS Law Now titled “DIFC clarifies certain requirements around the new UBO Regulations and sets informal grace period for compliance by DIFC registered entities” for further information on the UBO Regulations.
Following the implementation of the New DIFC Companies Regime, DIFC registered entities may need to now consider:
- amending their existing company name on marketing materials, company stationery and email signatures for example, to include the relevant suffix required (if not already included in its existing name) as well as with any authorities they may be registered with, e.g. the UAE Federal Tax Authority;
- updating their current articles of association to comply with the New DIFC Companies Law prior to November 2019;
- identifying any additional training needs directors may have in respect of the new directors duties imposed on them;
- assessing whether the company qualifies as a small private company for the purposes of annual accounting requirements and whether it wishes to forego the audit process if so; and
- identifying relevant UBOs and nominee directors relevant to each company and putting in place systems to ensure the registers are kept up to date and amendments notified to the DIFC Registrar of Companies in time.