Federal Law No. 2 of 2015 (the New Commercial Companies Law, (NCCL)) was issued and contained in Federal Gazette No. 577 with the publication date of 31 March 2015. As such the new law comes into effect three months from the date of the publication in the Official Gazette i.e. 1 July 2015.
While the NCCL replaces the previous Commercial Companies Law (UAE Federal Law No. 8 of 1984, as amended, (CCL)), it mostly maintains the same framework and features of the CCL. The NCCL anticipates and relies on later publication of various regulations to implement and/or expand upon many of its operative provisions. These further regulations are imperative to fully and comprehensively assess the NCCL.
The NCCL does not amend the foreign ownership restrictions but grants the Cabinet the right, upon the recommendation made by the Ministry of Economy, to limit certain classes of activity to UAE nationals only (Article 10). It is expected, however, that the foreign ownership restrictions will be dealt with under a new foreign investment law. Certain exemptions of the CCL have been retained, expanded and clarified (Article 4). These exemptions include: companies exempt pursuant to a Cabinet resolution or special Federal Laws; companies wholly owned by the Federal or Emirate Government and specific industry exemptions; companies exempted under the CCL and free zone companies.
The main new concepts introduced by the NCCL are:
- sole-shareholder companies either in limited liability or private joint stock companies;
- employees’ incentive share schemes;
- share pledges in limited liability companies;
- prohibition of financial assistance;
- enabling shareholders in public joint stock companies to sell their pre-emption rights;
- introduction of "holding companies", "strategic partner", "authorised capital" and "takeover rules"; and
- introduction of "corporate social responsibility".
The NCCL also amends the types of companies that can be now set up in the UAE. There are no longer seven but five types of company, such as: partnership company, limited partnership company, limited liability company, private joint stock company and public joint stock company.
Limited Liability Companies
The maximum number of shareholders remains at 50, but now a single shareholder can own an LLC (which resembles the form of a free zone establishment under the regulations of the free zones) (Article 71).
While the statutory pre-emption rights remain, the NCCL provides that in case of a disagreement on pricing between the shareholders, the pre-emption price will be determined by an expert with technical or financial expertise (Article 80).
While preserving the right of transfer of a partner’s shares to another partner(s) or third persons, the partner can pledge shares to other partners or third persons and the pledge can be registered in the commercial register (Article 79). However, it is to be seen how it will work in practice as both the inability of taking physical possession of share certificates and the statutory pre-emption rights concept still exist.
The NCCL also provides that in case of a creditor wanting to enforce its rights, but failing to agree with the debtor and the company on the conditions and mechanism of sale of the pledged shares, such pledged shares are to be disposed of by public auction following a request to the competent court. The shareholders will have the right to buy back the shares from the winning bidder within 15 days of the public auction on the same terms and conditions. This article also applies in case of bankruptcy of a shareholder (Article 81).
The NCCL still provides for an LLC to be managed by one or more managers but the limit of a maximum of five managers no longer applies (Article 83).
The NCCL sets out a minimum general assembly meeting notice of 15 days and the shareholders may agree on any means of communication of such meeting notice (Article 93).
The quorum for general assemblies has been raised from shareholders representing 50% to 75% of the share capital. Non-quorate meetings are to be reconvened within 14 days from the date of the first meeting and will be quorate if attended by shareholders representing 50% of the share capital. If the required quorum is not present at the second meeting, then a third meeting will be held 30 days from the date of the second/adjourned meeting and such meeting will be quorate with at least one shareholder in attendance (Article 96).
The NCCL also provides that, unless otherwise specified, the provisions of the law applicable to joint stock companies will also apply to LLCs (Article 104). It is unclear as to how this will be interpreted by the authorities and what the authorities’ intention was. However, until such clarification is provided, Article 104 has various material ramifications for LLCs. For example, until a further clarification is provided by the authorities, Article 222 dealing with prohibition of financial assistance applies not only to PJSCs but also to LLCs. As the NCCL does not include any "whitewash" procedure that would allow financial assistance to be approved by shareholders in certain circumstances, it appears that a strict compliance with this article will be required.
Under the new Article 222, neither the company nor any of its subsidiaries may give financial assistance to any person to subscribe in or buy its shares, bonds or sukuk. The concept of financial assistance extend to advancing loans, giving gifts or providing any security or guarantees. This will have several implications on the lending business, and we expect an immediate impact, amongst other types of transactions, on leveraged finance transactions where the target company offers financial assistance to secure the repayment of monies borrowed by the target’s acquirer.
Another interesting aspect arising out of Article 222 is that it appears that the financial assistance prohibitions extends to existing transactions involving financial assistance. This could result in the need for existing transactions to be restructured to ensure compliance with the law.
Private Joint Stock Companies
Other than the provisions relating to the public subscription for shares and as expressly provided, the provisions of the NCCL relating to public joint stock companies also apply to private joint stock companies. In addition there are some amendments applying only to private joint stock companies (Article 256).
Under the NCCL the minimum number of shareholders has been reduced to two and the maximum number is now 200. There are certain exceptions including existing companies, transfers by way of inheritance, court order, and one natural or corporate person may incorporate a private joint stock company (Articles 255 and 257).
The minimum share capital has increased to AED 5 million, to be paid up in full (Article 256).
The NCCL introduces the concept of a ‘’share register secretariat’’ which is defined as a body or bodies licensed by the SCA to keep register of private joint stock companies. Share transfers are only to be valid from the date of their registration with the share register secretariat (Article 260).
Under the NCCL, the lockup period for any transfer of shares following incorporation is one financial year and not two financial years as it was under the CCL (Article 264).
Public Joint Stock Companies
There have been a few changes introduced by the NCCL in respect of PJSCs.
The number of founding members has been changed from a minimum of 10 under the CCL to a minimum of five under the NCCL (Article 107), with the exception of the Federal and the Emirate Governments (and companies wholly owned by them) which may solely establish a PJSC.
The minimum share capital has been raised from AED 10 million to AED 30 million (Article 193). In respect of all the provisions of the NCCL, including this minimum share capital provision for PJSCs, the existing companies have one year from the law coming into force to ensure their compliance with all the provisions of the law (unless such time is extended under a resolution of the Cabinet) (Article 374). If a company wishes to issue shares paid up by non-cash consideration, an independent financial adviser must be appointed by SCA to perform an independent valuation of shares in kind/the relevant assets (Articles 118 to 120).
The NCCL now also draws a distinction between paid-up capital and authorised capital in respect of PJSCs (Article 193). Although the paid-up share capital for a PJSC should not be less than AED 30 million, the NCCL permits such companies to state the authorised capital in their articles of association provided that the authorised capital shall not be more than double the issued capital. The SCA is expected to issue legislation dealing with the method of the increase of share capital. The NCCL also states that any shareholder approval to issue new shares will lapse after one year from the date of approval (Article 194).
The NCCL introduces the option for a PJSC to convert its debt into equity via a special resolution by the company. This may only be done if the board of directors of the company successfully convinces the general assembly of the need to capitalise the debt. The board of the SCA is expected to pass a resolution outlining and streamlining criteria and the procedural requirements to capitalise the debt (Articles 195 and 225).
PJSCs may also now issue shares at a premium which must be authorised by a special resolution and a prior consent of the SCA. A resolution on the method of calculation of the premium is to be issued by the SCA (Article 196).
The quorum requirement of the constituent general assembly has been reduced to 50% of share capital (Article 131). A director will be deemed resigned if she or she is absent, without acceptable excuse, from more than three consecutive or five non-consecutive meetings during his/her term (Article 158).
The NCCL no longer distinguishes between an ordinary and extraordinary general assembly. It now recognises the concept of a "special resolution" to pass matters such as articles of association; change of name of the company and this will require the approval of 75% of the shares represented at a general assembly meeting.
The minimum notice to attend general assembly meetings has been reduced to 15 days and the shareholders representing 95% of the share capital can also agree on a shorter notice period (Article 172).
The options for the composition of the board have been limited. The board must comprise a majority of UAE nationals and at least two thirds of the directors must hold shares in the company (Article 144(2)). The number of directors must be an odd number between three and eleven (Article 143). The directors are elected by way of cumulative voting (Article 144). The powers of the board have been restricted further and the NCCL now provides that the directors may not enter into loans for a period of more than three years, sell property of the company or pledge movable and immovable property of the company unless authorised by the memorandum of association, or a special resolution of the general assembly of the company (Article 154).
The NCCL prohibits companies from making loans to directors (and their families), executing guarantees or providing any securities in connection with any loans granted to them (Article 153). The exemption for banks and credit companies no longer applies. Any provisions in the articles of association to the contrary will be void and the penalty for a breach of this provision is a fine between AED 100,000 and AED 500,000 or three months' imprisonment (Article 368).
The NCCL includes provisions prohibiting the provision of financial assistance by the company or its subsidiaries to any person to subscribe in or buy its shares, bonds or sukuk. This prohibition extends to advancing loans, giving gifts or providing any security or guarantees (Article 222). There is no statutory process by which financial assistance can be authorised.
The NCCL introduces the concept of the protection of minority shareholders’ rights and interests (for any shareholder holding at least 5% of the share capital). Such minority shareholder(s) may apply to the SCA and, if such application is rejected or not reviewed within 30 days, then to the court whereby the court may annul or require the taking of any act that is the subject of the application (Article 164).
The NCCL also provides that the founding members of a PJSC shall subscribe an amount of 30% to 70% of the issued share capital of the company at an initial public offering (IPO) (Article 117). This is a significant increase from the 20% to 45% range stipulated in the CCL.
The liability for an IPO prospectus is a joint liability and now extends to the founders’ committee and all parties involved in the establishment procedures, including their representatives (Article 123).
The NCCL now allows the local underwriting of IPOs and rights issues by underwriters licensed by the SCA. The NCCL also provides for a decree to be issued by the board of the SCA to regulate the activities of the underwriters (Article 123).
The NCCL recognises the book-building process with respect to the pricing of shares of a PJSC. Furthermore, the NCCL states that the SCA will issue a resolution setting out the book-building procedure (Article 129).
Although the NCCL also requires that the shareholders in a company are equal in the rights attached to their shares and that a company may not issue a different class of shares, it also provides for an exception allowing a resolution by the Cabinet of Ministers to be issued to allow other classes of shares, the conditions of issuing them and the rights and obligations arising from such shares in addition to the rules and procedures regulating them. It seems that this will apply to PJSCs but not other types of companies (Article 206).
The NCCL allows companies to offer shares to a "strategic partner" without first offering them to the existing shareholders (i.e. increase share capital outside the pre-emption rights regime). The strategic partner is to provide technical, operational or marketing support to the company, for the good of the company (quite a narrow definition excluding ability to raise capital in respect of persons whose activities are similar to the company). The conditions for offering shares to a strategic partner are:
- that the strategic partner carries out activities similar or supplementary to those of the company; and
- that the strategic partner has issued balance sheets for at least two financial years (this condition shall not apply to government entities, whether federal or local).
It also states that the board of the SCA will issue a resolution setting out further conditions and procedures for entry of a strategic partner as a shareholder in the company (Articles 223 and 224).
The NCCL provides for the right of shareholders to sell their pre-emption rights to another shareholder or to third parties for consideration. The board of the SCA is expected to issue regulations on the conditions and procedures of selling pre-emption rights (Article 197).
The NCCL permits a PJSC by way of special resolution to increase its share capital and to allocate such shares to employees of the company within an incentive scheme or plan, provided that such scheme or plan is approved by the general assembly of the company. The directors of a PJSC may not participate in such scheme or plan. The NCCL states that the board of the SCA may issue a resolution stating the mechanism and the conditions of implementation of such incentive scheme or plan (Article 226).
The NCCL also introduces another manner (in addition to the previous conversion and merger methods) in which a PJSC can be dissolved i.e. a takeover (Article 292).
The NCCL introduces the concept of ‘’holding companies’’. Under the NCCL a holding company (which may also be owned by a single shareholder) may be established for the purpose of holding shares in group companies, providing loans and guarantees, acquiring movables and immovables, managing its subsidiaries and holding intellectual property rights. Unlike the CCL, which requires companies to be operational, the NCCL prohibits holding companies from conducting business activities except through their subsidiaries (Articles 266 and 267).
The NCCL also gives the right to public and private joint stock companies to be licensed as "common investment companies" and permitted to establish and manage investment funds (Article 271).
Conversions, Mergers and Acquisitions (Articles 273 to 291)
The NCCL sets out different types of conversions, including the conversion from a public joint stock company to a private joint stock company and the conversion of any company to a public joint stock company, provided that the stipulated conditions are satisfied (Articles 273 to 276).
The creditors maintain their rights to object to the conversion to a public joint stock company within 30 days from the conversion while the shareholders objecting to the conversion within 15 days from the date of publication of the conversion will have their shares redeemed at either their book value or market value on the conversion (Article 278).
Under the NCCL the company registrar is required to maintain a trade names register (Articles 33 and 34) and the Minister of Economy will issue regulations addressing this role.
Compliance with the law
Article 374 of the NCCL states that all existing companies have one year from the effective date of this law to amend their memorandum of association and ensure their compliance with all the provisions of the law (unless such time is extended under a resolution of the Cabinet) (Article 374).
While the majority of amendments to the memorandum of association will most likely be minor, there are some that may have a significant impact on the company e.g. the requirement of the minimum capital of AED 30 million for a PJSC; the size of the board (if it is different as prescribed by the NCCL) for PJSCs and private joint stock companies, and the 75% quorum requirement for a general assembly of an LLC.
There are significant fines and indictment for non-compliance, for example failure to amend constitutional documents may even result in the dissolution of the company; directors and auditors found in breach may be removed from their office; and personal liability and significant fines may be levied on the officers in breach of the NCCL.