Guide to the DIFC Companies Law 2018

Guide to the DIFC Companies Law 2018 The Dubai International Financial Centre (DIFC) has made significant changes to the companies’ law regime from November 2018. The new Companies Law, DIFC Law No.5 of 2018, repeals and replaces the previous Companies Law (DIFC Law No.2 of 2009). One of the most important changes is to the classification of companies, which affects existing companies and new companies being established in the DIFC. Other key features include a more comprehensive set of codified directors’ duties, a new merger regime and a new compromise and arrangement procedure, which draw on best practice from other common law jurisdictions. The DIFC has also enacted new Companies Regulations, an Operating Law (Law No.7 of 2018) and Operating Regulations and Ultimate Beneficial Owner Regulations. Together, these form a new regime for companies doing business in the DIFC. We discuss some of the key features of the new companies’ law regime in the DIFC in this alert. DIFC Companies Law 2018: company classification at a glance What types of companies are regulated by the Companies Law 2018? Companies limited by shares. These may be private or public companies. What are the key features of private companies? A private company: > is a company limited by shares > cannot offer its shares to the public (but private placements are permitted) > may have between one and 50 shareholders > has no minimum share capital requirement > shares do not need to be fully paid up > is managed by at least one director > may or may not have a company secretary Private companies are subject to less stringent regulation than public companies. What are the key features of public companies? A public company: > is a company limited by shares > may offer its shares to the public > may have any number of shareholders (no maximum) > holds minimum share capital of US$100,000 > shares must be paid up to ¼ in value > is managed by at least two directors > has a company secretary Public companies are subject to more stringent regulation than private companies, for example in relation to governance, audit and reporting requirements. Is there still a concept of a limited liability company (LLC)? Is there still a concept of a Recognised Company? No. The concept of the LLC is no longer needed as the private company regime substantially mirrors the previous LLC regime, offering small businesses the ability to do business under a lighter regulatory regime. Yes. A recognised company is a foreign company undertaking business activities from a place of business in the DIFC and registered with the DIFC Registration Authority. Existing Registered Companies will be grandfathered into the new regime. New companies law regime 10 key issues for DIFC companies arising from the new regime 1. Automatic conversion: Existing DIFC companies have been automatically converted to either a public or private company limited by shares. While companies are not required to take any specific action to convert their company classification, companies should consider if they are happy with their new company type on conversion or if they wish to convert to a different company type. 2. Changes to Articles of Association: Companies must amend their Articles of Association within 12 months of the date the law came into force (ie by 12 November 2019), otherwise they may be subject to a fine. New standard Articles of Association (which are primarily designed for private companies) are available from the DIFC Registrar of Companies for adoption, in whole or in part, by existing and new DIFC companies. Submission of a modified set of Articles of Association to the DIFC Registrar of Companies must be accompanied by a statement from the incorporator in relation to the initial set of articles, or a directors’ certification in relation to post-incorporation revisions (a legal opinion from the company’s legal advisers is no longer required), in each case stating that the modified set of Articles of Association is in compliance with the new Companies Law. Companies should consider if any changes are required or desirable to reflect their converted status or new powers. For example, companies should include the new company name suffix, private companies may wish to consider whether to disapply pre-emption rights, public companies may need to increase their capital, companies which used to be LLCs will need to amend provisions on membership interests and share transfers. 3. Company name: The company name must be followed by the correct suffix, including in their Articles of Association, all letterhead, websites and email signatures: for private companies, the company name must be followed by “Limited” or “Ltd” and for public companies the name must be followed by “Public Limited Company” or “PLC”. The DIFC Companies Registrar has automatically updated DIFC company names in the Register of Companies on conversion. Companies must not use the former company name after 12 November 2019. 4. Capital requirements for public companies: Public companies should check if they need to increase their capital to comply with minimum capital requirements. This must be actioned by 12 November 2019. 5. Directors’ duties: Directors will need to familiarise themselves with the enhanced duties which they owe to their companies under the new regime and ensure they are compliant. Companies may wish to consider updating their internal policies and training procedures. 6. Annual confirmation statement: On renewal of their licence, companies must now file a confirmation statement with the DIFC Registrar of Companies, instead of filing an annual return. A fine may be imposed for failure to do so, or for providing inaccurate or misleading information. 7. Transitional provisions for LLCs: There are transitional provisions for companies that have been converted from LLCs. For example, a member’s membership interests will have been divided into shares and each holder of a membership interest shall be deemed to be a shareholder holding an equivalent number of shares in the company. There are deemed provisions in the Articles of Association (for example, on share transfers) which will apply until the Articles are updated to comply with the new regime. Managers of an LLC are considered to be directors of the company following conversion. 8. New registers of ultimate beneficial owners, nominee directors and debentures: Companies are now required to keep registers of the following information, for the first time: a register of ultimate beneficial owners (which must be established by 10 February 2019), a register of nominee directors (if any) (which must be established by 11 January 2019) and a register of debentures (if they have issued debentures) (which must be established by 12 November 2019). 9. New merger and compromise regime: A new merger regime is available to companies in the DIFC wishing to merge with other companies, including those established in jurisdictions outside the DIFC. 10. New compromise procedure: Companies may use a new compromise or arrangement process to agree solvent or insolvent restructurings with creditors or shareholders. This is similar to an English scheme of arrangement. Existing companies registered in the DIFC were automatically converted on 12 November 2018, as follows: For private companies, the company name must be followed by “Limited” or “Ltd” and for public companies the name must be followed by “Public Limited Company” or “PLC”. The DIFC Companies Registrar was required to enter name changes in the Register of Companies on conversion. Company limited by shares (unlisted) Limited liability company Private company Company limited by shares (publicly listed under the DIFC Markets Law 2012 or with shares admitted to trading on a Regulated Market) Company with more than 50 shareholders Public company Companies generally have a one-year transitional period to comply with the new Companies Law, which ends on 12 November 2019. In particular, companies must update their Articles of Association, cease to use their former names, and public companies must increase their share capital (if required) by this date. Companies must comply with some new obligations sooner, including establishing a register of nominee directors (if any) (by 11 January 2019) and a register of ultimate beneficial owners (by 10 February 2019). Transitional provisions Automatic conversion Directors of public and private companies owe an expanded set of codified duties under the Companies Law 2018 to their companies. These duties mirror directors’ statutory duties under English law. Directors must: The suite of codified duties represents a wider range of duties than under the previous Companies Law, which were more narrowly focussed on duties to act honestly, in good faith and lawfully with a view to the best interests of the company and to declare interests in transactions. In relation to conflicts of interest, the new Companies Law also expands on the requirement for directors to declare their interests. For example, a declaration of an interest in a proposed transaction or arrangement must be made before entering into the relevant transaction or arrangement. Directors will need to carefully consider the range of duties they owe to the company under the new Companies Law, the existing Law of Obligations (Law No.5 of 2018) and the company’s Articles of Association and ensure they comply with these duties. In the absence of any jurisprudence of the DIFC Courts on the scope of the new duties, it may be helpful for directors of DIFC companies to consider the English common law analysis of the equivalent English law duties, given the duties are broadly the same as under English law and DIFC Courts may consider decisions from other jurisdictions as part of their decision-making process. As a general rule, shareholders benefit from pre-emption rights on the allotment of new shares. This represents a new statutory right for shareholders, as pre-emption rights were not provided for under the old regime. There are some exceptions to the general rule, including in the case of bonus shares, employee share schemes and shares which are to be wholly or partly paid up otherwise than in cash. Companies can waive or vary pre-emption rights by special resolution, if this is recommended by the directors, or (in the case of private companies only), in their Articles of Association. There are no statutory shareholder pre-emption rights on the transfer of shares. The Companies Law 2018 makes some changes to the financial assistance regime. It clarifies the scope of the restriction to the newly classified company types: > a public company, or a subsidiary of a public company, is prohibited from providing financial assistance for a person to acquire shares (or units of shares) of that public company, unless an exemption applies > a public company is also prohibited from providing financial assistance for a person to acquire shares (or units of shares) of its holding company which is a private company, unless an exemption applies Accordingly, a private company will be subject to the restriction if it is a direct or indirect subsidiary of a public company (where the assistance is given for the acquisition of shares in that public company). A private company is not restricted from giving financial assistance for the acquisition of its own shares. Previously, the restriction only applied to public companies. There are also some additions to the exemptions from the restriction. There are two new exemptions, in addition to the existing exemptions. New exemptions > Financial assistance given in connection with or for the purposes of an employee share scheme of the company. > The financial assistance is only an incidental part of some larger purpose of the company and it is given in good faith in the interest of the company. Existing exemptions > Financial assistance which (i) does not materially prejudice the interests of the company or its shareholders, or the company’s ability to discharge its liabilities as they fall due, and (ii) is approved by a resolution of the shareholders holding not less than 90% in share value of the shares giving a right to attend and vote at any shareholders’ meeting. > The company’s ordinary course of business includes providing finance and the financial assistance is given in the ordinary course of that business and on ordinary commercial terms. > Any other financial assistance exempted by the Companies Regulations. There are no such exemptions set out in the Companies Regulations at present. In other aspects, the financial assistance regime is unchanged. Act within powers Exercise reasonable skill, care and diligence Exercise independent judgement Not accept benefits from third parties Promote the success of the company Avoid conflicts of interest Declare an interest in proposed/existing transaction Enhanced directors’ duties New shareholder pre-emption rights Revisions to the financial assistance regime New compromise and arrangement regime New merger regime A new merger regime is available to public or private companies in the DIFC wishing to merge with other companies, including those established in jurisdictions outside the DIFC. Mergers have not previously been regulated. The new merger provisions provide that the companies are merged and continue as one company. There are two alternative ways of completing the merger: either (i) the companies continue as one new company, newly incorporated in the DIFC or elsewhere, or (ii) one company is merged into another company, with the effect that one company continues as the survivor company and one company ceases to be incorporated as a separate company. Merger agreement: A merger agreement must set out specific details required by law, including the terms and means of effecting the merger and the proposed Articles of Association of the resulting merged entity. Director’s approval: The directors of each merging company must pass a resolution approving the merger and stating that in their opinion it is in the best interests of the company. A solvency statement may be required, or an application to court to approve it if a solvency statement is not made. Shareholders’ approval: The merger agreement must be approved by special resolution of the shareholders of each merging company. This requires shareholders representing not less than 75% of the total voting rights of the shareholders to vote in favour of the merger. A shareholder of a merging company who did not vote in favour of the merger may apply to the court for an order of unfair prejudice (the application is made within 28 days of approval of the merger). Rights of creditors: The creditors must be given notice of the merger. A creditor of a merging company may apply to court for an order restraining the merger or modifying the merger agreement. There is a new procedure which permits a DIFC private or public company to enter into a compromise or arrangement with its shareholders or creditors (or any class of them) which, if approved by the requisite majority of such creditors or shareholders and sanctioned by the court, will be binding on all of them, whether or not they voted in favour of it. It is in many ways similar to an English scheme of arrangement. The parties to the arrangement have wide discretion as to the nature of the arrangement they may propose, as the law does not set out any provisions on the content of any compromise or other arrangement. With no restrictions on timing set out in the law, it appears that the length of the procedure may vary depending on the complexity of the arrangement (similar to an English scheme). Application: The company, its creditor(s) or its shareholder(s) (or in the case of a company being wound up, its liquidator) may apply to the DIFC Court to commence a compromise or arrangement procedure. January 2019 GC14902A_F/12.18 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to www.linklaters.com/regulation for important information on our regulatory position. linklaters.com Approvals: The following approvals are required: > for an arrangement with creditors, a majority in number representing at least ¾ in value of creditors (or class of creditors); or > for an arrangement with shareholders, a majority in number representing at least ¾ in value of shareholders (or class of shareholders), together with the approval of the board of the company. Court sanction: The DIFC Court has the authority to sanction a scheme, if approved by the creditors or shareholders and the company. Once sanctioned, the DIFC scheme will be binding on all creditors or shareholders, including any dissenting minority creditors and shareholders. The DIFC Court has wide discretion to make any other orders it considers appropriate to facilitate the compromise or arrangement, including the reconstruction of the company, or an amalgamation of the company with any other company. The procedure can be used by companies to agree solvent or insolvent restructurings. Perhaps the most significant impact of this new procedure may be in a debt restructuring context, where it will allow the claims of creditors, including secured creditors, to be compromised without their consent (something that has not previously been possible). The popularity of the new procedure for insolvent restructurings will, to some extent, depend on the nature of the reforms which are expected to be made to the DIFC insolvency regime in 2019. Under proposals issued in 2018, a reformed insolvency regime would offer a new debtor-in-possession rehabilitation procedure for debtors in financial difficulty which features, among other things, a “cram down” mechanism to bind all creditors or shareholders if approved by the required majority of them. New ultimate beneficial owner regime Selected other issues The provisions set out a framework for the compromise and arrangement procedure, leaving room for flexibility in its implementation. There are some open questions, such as around class composition, cross-class cramdown and the procedure’s use and recognition in cross-border restructurings. Developing a body of case law and market practice around these issues should enable companies, their shareholders and their creditors to develop confidence in this new procedure. It is possible that the DIFC Courts may consider the body of English common law which has developed around the legal framework for English schemes of arrangements, as and when they are required to consider similar issues in future proceedings before them. DIFC companies must establish a register of “Ultimate Beneficial Owners” by 10 February 2019. Ultimate Beneficial Owners (or UBOs) are individuals who own or control (directly or indirectly) at least 25% of the shares or voting rights in the company or the right to appoint or remove the majority of directors of the company. This is a new obligation. There are some exceptions, including public companies which are listed on a recognised stock exchange, companies regulated by the Dubai Financial Services Authority (or a regulator with equivalent standards in another jurisdiction). Companies are required to notify UBOs of their entry in the register. The company may request confirmation as to whether that person has an interest, and details of that interest. There may be penalties for a person who fails to comply. The register is not open to the public. Companies must submit the information on UBOs to the DIFC Registrar of Companies, who may use this information for the purposes of DIFC regulations relating to money laundering and terrorism financing, unlawful organisations and sanctions compliance. Companies must also keep a register of nominee directors, if they have any. A director is a nominee director if he is under an obligation to act in accordance with the directions, instructions or wishes of another person. Shorter notice periods for meetings: General meetings of shareholders can now be called on 14 days’ written notice (this is reduced from 21 days under the previous law). Annual general meetings require 21 days’ written notice. Shorter notice is possible with shareholder approval (in the case of public company AGMs, this must be unanimous). Notice may be delivered by post, electronically or on a website. Written resolutions: Written resolutions of shareholders no longer need unanimous consent to pass. The usual consent thresholds apply – a simple majority of the total voting rights of the shareholders for ordinary resolutions, and a majority of shareholders representing not less than 75% of the total voting rights of the shareholders for a special resolution. Audit: There is a new exemption from the requirement to prepare audited accounts and auditor’s report for approval by the shareholders for small private companies (ie those with annual turnovers of not more than US$5m and with not more than 20 shareholders). Pre-incorporation bank accounts: It should no longer be necessary to provide bank statements as evidence that the share capital of a newly incorporated private company has been paid up, prior to finalising the incorporation process for a new DIFC company. Under the new Companies Law, there is no requirement for shares in private companies to be fully paid and as such, no requirement to evidence bank statements from a newly established bank account as part of the incorporation process. This should make incorporating a new DIFC company quicker. Penalties: Companies may face fines for breach of their obligations under the new Companies Law, the Companies Regulations, the Operating Law, the Operating Regulations and Ultimate Beneficial Owner Regulations, which may be significant (up to US$50,000 in some cases). The DIFC Registrar of Companies also has the ability to revoke, suspend or vary the terms of a company’s license in the event it breaches DIFC laws of regulations. Scott Campbell Middle East Managing Partner Dubai Tel: +971 4 369 5811 [email protected] Nick Edwards Partner Abu Dhabi Tel: +971 2 659 2124 [email protected] Waleed Rasromani Managing Associate Dubai Tel: +971 4 369 5817 [email protected] Caroline Cheney Senior PSL London Tel: +44 20 7456 4400 [email protected] Abeer Jarrar Managing Associate Dubai Tel: +971 4 369 5834 [email protected] Rose Lee Managing Associate Abu Dhabi Tel: +971 2 659 2114 [email protected] Key contacts