The UAE's new Commercial Companies Law No. 2 of 2015 (the “CCL”) introduced a number of changes impacting those operating in the country. In light of the implementation deadline of 30 June 2016, these changes need to be reflected in the Articles of Association (the "AoA") of every UAE limited liability company (LLC). Some of the key changes are highlighted below, given their importance and materiality.
- The recommended changes are collated based on the practice and informal discussions with officials at the Department of Economic Development ("DED"). There is no official list or circular identifying the mandatory changes that an LLC must introduce to its AoA.
- The grace period for amending the AoA will expire on June 30, 2016. A daily penalty of AED 2,000 is payable thereafter and there could be a potential risk of dissolution of the LLC.
- Additional changes may be required by the Notary Public in the UAE and/or the DED upon review of the respective AoA.
- Based on our interpretation of the CCL and on informal discussions with the DED, changes under the "Mandatory" section are those changes that are likely to be deemed compulsory and must be reflected in the AoA before the June 2016 deadline.
- Changes under the "Optional" section are those that are not mandated by law, and making such changes is desirable, but discretionary. These changes do not affect the substance of the AoA and do not require immediate implementation.
Details of Shareholders
Article 74 of the CCL requires the AoA to include the full name, nationality, date of birth and place of residence/domicile of each founder/shareholder.
If any of these details are not reflected in the AoA, the respective provision must be amended.
Meetings of the General Assembly
The CCL has removed the reference to extraordinary meetings, i.e. there is no distinction between an ordinary and an extraordinary meeting. There are special resolutions that necessitate a special quorum.
Any such reference to “extraordinary” must be replaced with "general assembly".
Quorum of the General Assembly
Article 96 of the CCL introduced three levels of quorums. The minimum attendance quorum of the shareholders’ assembly has been increased from requiring the attendance of shareholders holding 50% of the share capital to 75%, at the first meeting. If the quorum is not met in the first meeting, after observing a notice period of 14 days, a 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, which shall be valid with no minimum quorum requirement.
The AoA must be reviewed and amended to reflect this change (if necessary) and ensure maintenance of adequate control levels.
Article 80(2) of the CCL provides for a pre-emption right where every shareholder is required to offer his/her shares to the existing shareholders by serving a 30-day prior notice to the management detailing the agreed sale price and the identity of the potential buyer of the offered shares. This requirement has been in place under the auspices of the former law. However, the CCL has introduced a requirement whereby, in the event of disagreement on the sale price, the price of such share(s) shall be determined by experts appointed by the DED. The former law attributed the power to evaluate shares to the auditor.
If the AoA include references to the role of the auditors in the valuation of shares or the sale process in contradiction with Article 80, then the respective references must be amended.
Powers of Managers
If the LLC’s operation and business require empowering the manager(s), or board of managers as the case may be, to independently execute agreements containing arbitration clauses, execute loan agreements of a tenor of more than three years, or mortgage/dispose of assets, the AoA must expressly empower the manager(s) or board of managers to do so.
Otherwise, a special shareholders’ resolution must be passed each time any such action is required. This requirement is derived from Article 104 of the CCL, which extends the application of all the provisions governing joint stock companies to LLCs, unless there is a special provision stipulating otherwise.
Article 27(3) requires LLCs to apply the International Accounting Standards and Practices.
If the AoA provide for different accounting standards, the relevant article must be amended in compliance with this requirement.
Valuation of In-kind Contributions
Article 78 of the CCL provides that valuation of shares in kind may be carried out by the shareholders themselves, subject to approval of the DED or through a financial expert approved by the DED.
If the AoA include a reference to the role of the auditors in in-kind valuations, then this reference must be amended.
References to the Former Companies Law of 1984
Any references in the AoA to the former Companies Law of 1984 are to be replaced with reference to the CCL.
Any reference to specific articles of the former law must be replaced with the corresponding article(s) of the CCL.
Method of Notification for General Assembly
Invitations to general shareholders’ assemblies of an LLC may now be sent to the shareholders by any means, which encompasses electronic mail.
If the LLC’s practice is to send invitations electronically, an express provision must be added to the AoA.
Notice Period of the General Assembly
Article 96 of the CCL allows for a shorter notice period for convening a General Assembly, stipulated as 15 days, and such minimum period may be reduced even further if agreed upon by the shareholders. Previously, the minimum notice period was 21 days.
If the LLC wishes to reduce the notice period, the relevant article of the AoA should be amended accordingly.
The former Companies Law of 1984 was silent on share pledges, and there has always been controversy around the enforceability of share pledges in LLCs. However, Article 79(1) of the CCL now states that a shareholder may pledge his/her share to a third party or to another shareholder.
If an LLC wishes to restrict the creation of share pledges, a provision must be included to that effect in the AoA.
If the LLC wishes to permit share pledges, it is recommended to expressly permit them under its AoA.
Number of Managers
The former law allowed for a maximum of five managers/directors for LLCs. However, the CCL has lifted this cap.
If the LLC wishes to appoint more than five managers/directors, the relevant article in the AoA should be amended accordingly.
Single Shareholder LLCs
The former Companies Law of 1984 required a minimum of two shareholders to set up a limited liability company. However, Article 71 of the CCL now permits a sole shareholder to set up an LLC. However, only Emiratis (and potentially GCC nationals) may be able to adopt this structure as a result of the foreign investment restrictions.
If an LLC or a sole proprietorship wholly owned by Emiratis wishes to convert to a single shareholder LLC, the AoA should be amended and restated in their entirety, in addition to a number of other requirements that must be complied with.