This memorandum is for informational purposes only and does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. Recipients are not to construe its contents, or any prior or subsequent communications as legal, investment or tax advice, and should make their own evaluation of the relevance and adequacy of the information, seeking appropriate legal or other professional advice as deemed necessary. PRELIMINARY INSIGHTSTHE NEW UAE COMMERCIAL COMPANIES LAW May 2015 Private and confidential 2 The long-awaited UAE Commercial Companies Law No. 2 of 2015 (the "CCL") has finally been issued. The CCL will come into force by the end of June 2015. It substitutes the old Commercial Companies Law in its entirety. All existing companies must comply with the CCL within one year (expiring end of June 2016), unless otherwise expressly stated in the CCL. Several implementing regulations and decrees are yet to be enacted to give effect to some of the newly introduced provisions such as the establishment of the Registrar which is the body that is entrusted with handling the trade names registrations, among other things. The 51% local shareholding requirement continues to apply. However, the CCL contemplates that free zone companies will be permitted to apply for a license to carry out activities onshore or in other free zones, subject to the terms and conditions to be set out by the Council of Ministers. The issuance of the resolution of the Council of Ministers will determine to which extent free zone companies will be granted this flexibility and whether this right will, as a matter of fact, lax the 51% local shareholding requirement. The absolute exceptions from the application of the old Commercial Companies Law granted to oil companies, electricity and water desalination companies have been abolished and replaced by a different concept. Exceptions are granted (a) to special entities by virtue of a resolution of the Council of Ministers, or (b) to entities wholly owned by the Federal Government or Local Government or wholly owned affiliates of such entities, or (c) to entities in which the Federal Government or the Local Government owns directly or indirectly a 25% stake operating the field of oil exploitation, power, electricity and water desalination industries, or (d) entities exempted by a special federal law. The CCL does not affect any of the entities that have been exempted from the application of the old Companies Commercial Law. Those entities continue to enjoy the status afforded to them. Having said that, we are highlighting hereunder our preliminary insights on the CCL that may be of interest to our clients. The most positive and notable changes are as follows: i. Companies, including limited liability companies entities, may be formed by a single shareholder as opposed to the old Commercial Companies Law in which a minimum requirement of two shareholders has been in place. In such case, the name of the company shall bear the name of the single shareholder1 . The application of this option, in practice, remains to be prudently observed. Moreover, this option may only be applicable without prejudice to the local shareholding requirement. ii. The articles of associations of a limited liability company may contain "restrictions on share transfer". Whilst as matter of fact restrictions were included in articles of associations after back and forth discussions with the notary public, this provision, will hopefully place the shareholders in a better position in the discussions with the notary public. iii. The legal controversy around whether a pledge may be created over the shares of a limited liability company, due to the non-physical nature of those shares, has come to an end. The CCL permits the creation of pledges over such shares provided that the pledge is recorded in a notarized document and registered in the commercial registration of the company2 . iv. The concept of holding companies has been introduced in the CCL3 . 1 Article 8 of the CCL. 2 Article 79 of the CCL. 3 Article 201 of the CCL 3 v. Investment funds have been addressed under the CCL and may now be established and have a juristic personality. Whilst there are positive aspects of the new CCL, there are some provisions that may create problematic situations when implemented: i. Penalties and sanctions have been tightened. One of the crucial sanctions relates to dividends distribution. A manager or a board of directors that distributes profit in contravention with the text of the CCL or the articles of associations of the Company may be subject to imprisonment for a minimum of six (6) months and a maximum of three (3) years and/or a fine of a minimum of AED 50,000 and a maximum of AED 500,0004 . This novel provision may affect side arrangements entered into with local shareholders in relation to onshore legal presences. Management may become reluctant to make direct dividends payments to foreign shareholders if the shareholders resolution is not in line with the express terms of the articles of association. On this related topic, under the CCL, it is now expressed that any transfer of shares effected in violation of the 51% local shareholding requirement is null and void. However, the CCL does not address the concerns related to the annulment of the share transfer and how the assets of the company will be dealt with, if the sanction is not the annulment of the company, but the annulment of the share transfer5 . The general principles of annulment will apply. ii. Article 104 stipulates that all the provisions governing "joint stock companies" shall apply to "limited liability companies" to the extent not expressly regulated by a special provision. The same concept is also applied for private joint stock companies where Article 265 states that, expect for any special provision and for the rules on public offering, the rules governing "public joint stock companies" shall govern "private joint stock companies". Those provisions require further reflection and clarification since identifying the provisions that would extend to limited liability companies and/or private joint companies is problematic. While in theory, many of the provisions may apply to all types of companies, however, some may conflict with the nature of limited liability companies and private joint stock companies as "closed" companies that are not making any offering to public. The practical application of those provisions has to be prudently observed. iii. Another complication may arise from the newly introduced provision in relation to preemption rights in limited liability companies. It is contemplated that if an existing shareholder exercises its preemption right but disagrees on the sale price offered by the selling shareholder, said existing shareholder is entitled to require the Department of Economic Development to appoint an independent expert (financial and technical), at its own expense, to evaluate the shares6 . This text implies that the existing shareholder may exercise its preemptive right without being bound to the sale price determined by the selling shareholder in the sale notice and hence, the selling shareholder will not be freely entitled to sell to another buyer until the evaluation is completed. This provision might also have implications and possible delays on the sale of shares of legal vehicles set up through side arrangements with local shareholders iv. Prior to 2009, the old Commercial Companies Law had originally provided for a AED 150,000 minimum capital for limited liability companies. In 2009, this minimum capital has been 4 Article 363 of the CCL. 5 Article 10 of the CCL. 6 Article 80 of the CCL. 4 abolished and replaced with an “adequate capital requirement”7 (although, in practice, some activities were still required by the authorities to have a certain minimum requirement). Now, with the CCL, the “adequate” reference has remained as is but with the possible issuance of a decree setting minimum capital requirements 8 . i. An express restriction has been imposed on the release of capital deposited by limited liability companies under incorporation. Banks may only release the capital upon the submission of evidence confirming the completion of the registration process of the company9 . This restriction exists in many jurisdictions and is not uncommon, but it has not been expressed under the old Commercial Companies Law. New requirements have been also introduced and we are addressing a number of them below: i. Invitations to general shareholders assemblies of a limited liability company may now be sent to the shareholders by any method/mean, and not necessarily by registered courier as originally set out under the old Commercial Companies Law, provided that the articles of associations stipulate the permitted means of notification. The pre-notification period has been reduced from 21 days to 15 days, unless the shareholders agree on a shorter period10 . However, the minimum attendance quorum has been increased from requiring the attendance of shareholders holding 50% of the share capital to 75%. If the quorum is not met in the first meeting, another meeting should be called for, after observing a notice period of 14 days, and this second meeting shall be valid if attended by shareholders holding 50% of the share capital. If the quorum is not met in the first two meetings, a third meeting is called for, after observing a notice period of 30 days, and this third meeting shall be valid with no minimum quorum requirement11 . ii. Any changes to the registered information/details of the company including its name, address, capital, number of shareholders or legal form must be notified to the Department of Economic Development and the Registrar within 15 Business Days from the date of introducing such change12. It is worth noting that the managers or board of directors of a company who fail to register the articles of associations of or any amendments thereto in the commercial register of the company are personally liable for any damages caused to the company, the shareholders or third parties as a result of such failure. iii. Accounting records must be kept by a company for at least five (5) years from the end of each financial year in its premises13 . The CCL contemplates that companies will be permitted to keep such records electronically. However, a decree by the Minister of Economy is to be issued to set out the necessary guidelines for electronic archiving. Public offerings The CCL is reiterating that any public offerings by public joint stock company, whether onshore or free zone, must be pre-authorized by the Emirates Securities and Commodities Authority. More 7 Article 226 of the old Commercial Companies Law. 8 Article 76 of the CCL. 9 Article 76 of the CCL. 10 Article 93 of the CCL. 11 Article 96 of the CCL. 12 Article 15 of the CCL. 13 Article 26 of the CCL. 5 importantly, marketing public offerings in the UAE by a foreign entity that does not have any presence in the UAE may take place in the UAE provided that the prior approval of Emirates Securities and Commodities Authority is sought14 . Hence, all financial institutions and investment bankers have to adopt a prudent approach when undertaking any marketing activities of foreign securities in the UAE and are advised to seek the necessary approvals. Public joint stock companies i. The CCL continues to govern the operations of public joint stock companies i.e. companies making public offerings, unlike other jurisdictions which have put in place special laws governing public companies. Numerous aspects of public joint stock companies have been amended under the CCL. ii. The minimum capital has been increased from AED 10 Million to AED 30 Million. It is not clear whether companies formed under the auspices of the old Commercial Companies Law are not subject to the higher minimum capital requirement. iii. The minimum number of founding shareholders has now been reduced from 10 shareholders to 5 shareholders.15 However, public joint stock companies formed by the Federal Government, a Local Government or any wholly owned government entity may have a lesser number of shareholders. iv. In line with international market practice, at the time of incorporation, founding shareholders may subscribe into at least 30% and up to 70% of the share capital of a public joint stock company, prior to the public offering16 (under the old Commercial Companies Law, the percentage was at least 20% and up to 45% only). v. Preemptions rights may not be waived in the resolution of a capital increase. To confirm the already applied regulations of "Right of Issue" of the Emirates Securities and Commodities Authority, a shareholder may "sell" the preemption right to another shareholder or to a third party for a consideration, as regulated by the Emirates Securities and Commodities Authority. More importantly, a public joint stock company may increase its capital and offer all or part of this increase to a "strategic shareholder" 17without the application of the preemption right. A "strategic shareholder" is defined as a shareholder offering a beneficial technical, operational or marketing support. The presence of the Strategic Shareholder should bring in a genuine added value to the public joint stock company, among other conditions related to its audited financial statements18 . vi. In-kind contributions in a public joint stock companies are evaluated by independent financial advisors, appointed by the Emirates Securities and Commodities Authority, while under the auspices of the former law, a government committee was entrusted with this task19 . vii. Underwriters may be appointed. The Emirates Securities and Commodities Authority is yet to issue the relevant regulations regarding the functions of underwriters20 . 14 Article 32 of the CCL. 15 Article 107 of the CCL. 16 Article 117 of the CCL. 17 Article 224 of the CCL. 18 Article 197 of the CCL. 19 Article 118 of the CCL. 20 Article 123 of the CCL. 6 viii. Public joint stock companies may opt to apply the securities book building mechanism for public offerings. Emirates Securities and Commodities Authority is yet to issue the relevant regulations regarding the mechanics of the system. The maximum nominal value of shares has been set at AED 10021. This cap is rather incomprehensible since the CCL has permitted book building. ix. The restriction on the transfer of shares of founding shareholders of public joint stock companies for two (2) full financial years following listing or from the date of registration at the commercial register if the relevant company is exempt from the listing requirement continues to be prescribed in the CCL22 . It has been anticipated that, as a minimum, the term of this restriction will be reduced for non-greenfield projects. x. Related parties transactions are restricted and may only be concluded if approved by the general shareholders' approval if the value of the transaction exceeds 5% of the share capital. Related parties are defined as the chairman, board members, executives and employees of a company, any companies in which any of the foregoing individuals own a medium of 30% of its share capital, and affiliates, subsidiaries and associated companies23 . xi. Debt to equity conversion has now been provided for under the CCL24 . The related regulations are yet to be issued. xii. Public joint stock companies may now increase their capital for the purpose of creating a stock option plan for the employees. Implementing regulations by the Emirates Securities and Commodities Authority are yet to be issued to set the terms and conditions of stock option plans25 . Private joint stock companies i. The minimum capital has been increased from AED 2 Million to AED 5 Million26. Companies formed under the auspices of the old Commercial Companies Law are not subject to the higher minimum capital requirement. ii. The minimum number of founding shareholders has now been reduced from 3 shareholders to 2 shareholders. iii. The restriction on the transfer of shares of founding shareholders of private joint stock companies has been reduced from two (2) full financial years following the registration at the commercial register to one (1) full financial year (this restriction applies for each capital increase). iv. Private joint stock companies will not be bound by the corporate governance rules issued by Securities and Commodities Authority, which is unsettling, especially in relation to listed Private Joint Stock Companies. This does not apply to financial institutions, financial investment companies and currency houses27 . 21 Article 129 of the CCL. 22 Article 215 of the CCL. 23 Article 152 of the CCL. 24 Article 225 of the CCL. 25 Article 226 of the CCL. 26 Article 256 of the CCL. 27 Article 6 of the CCL. 7 Some legal concepts have been also reinforced/introduced in the CCL i. The concept of a "prudent person" has been introduced. The "person delegated to manage a company" must (a) preserve the rights of the company, (b) exert the efforts of a "prudent person"; and (c) carry out all the acts in compliance with the objectives of the company and in line with the powers afforded to him/her by the company. A "prudent person" is defined as a person who has sufficient expertise and necessary commitment in performing his/her work28 . ii. Although, as a civil law jurisdiction, good faith is always presumed and courts apply this principle in a consistent manner, the CCL has reinforced this concept and has emphasized that third parties acting in good faith, whose dealings with a company are preserved, are those who as a result of their relationship with the company, as matter of fact, are not aware of, or could have become aware of, the deficiencies in the acts held against the company.29 iii. The CCL has also addressed the issue of limitation of liability and has expressed that any provisions in the articles of association permitting a company or any of its affiliates to limit the personal liability of any person from acts carried out in his/her capacity as holding office in the company shall be null and void30 . Conclusion The CCL has been issued very recently and therefore, its application and interpretation will be an on-going process at the present time and in particular until the suite of implementing regulations is issued. Clients conducting business in the United Arab Emirates are advised to carefully review the text of the CCL and to seek legal advice before proceeding with any activity or act that has been re-regulated by the CCL. 28 Review the "definitions" and Articles 22, 51 and 55 of the CCL. 29 Article 25 of the CCL. 30 Article 24 of the CCL. 8 Contacts Dr Habib Al Mulla Chairman T: +971 4 423 0000 email@example.com Mazen Boustany Partner T: +971 4 423 0002 firstname.lastname@example.org Tom Thraya Partner T: +971 4 423 0068 email@example.com Ghada El Ehwany Knowledge Manager T: +971 4 423 0065 firstname.lastname@example.org www.bakermckenzie.com Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. 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