Following the publication of the new Federal Law (No.2 of 2015), the new Commercial Companies Law (NCCL), in the Federal Gazette in March 2015, the NCCL comes into effect today.
While the NCCL replaces the previous Commercial Companies Law (CCL), UAE Federal Law No. 8 of 1984, as amended, it mostly maintains the same framework and features of the CCL. However, the NCCL also 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.
Foreign ownership restrictions
The most anticipated change to the CCL in respect of amending the foreign ownership restrictions was rejected. However, it is expected 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. These 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.
JSC and LLC companies
Potential ramifications of Article 104
The NCCL states that, unless otherwise specified, the provisions of the law applicable to joint stock companies will also apply to limited liability companies (LLCs). 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 public joint stock companies (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 extends 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 extend to existing transactions involving financial assistance. This could result in the need for existing transactions to be restructured to ensure compliance with the law.
Compliance with the NCCL
The market has been seeking further clarifications since the NCCL was published in March and, while all companies are required to amend their memorandum of association in order to comply with the NCCL, they have until 1 July 2016 to comply (unless such time is extended under a resolution of the Cabinet). Any company which does not make the necessary amendments to its memorandum of association by the stipulated date will be deemed to be dissolved.
While there are many amendments that the companies will need to address in order to comply with the NCCL within the stipulated timeframe, some of them include, but are not limited to:
- an increase of the minimum share capital for PJSCs and private joint stock companies from AED 10 million to AED 30 million and from AED 2 million to AED 5 million respectively;
- an express obligation on the directors and managers to preserve the rights and works of the company with the care of a precise person and a new article voiding any provisions in a company’s memorandum of association authorising the company to exempt an officer from his/her personal liability in their capacity as an officer;
- the right of shareholders to pledge shares in an LLC in accordance with the company’s memorandum of association under an official notorised document and to enter that pledge in a central commercial register;
- no maximum number of managers for LLCs and the managers not being permitted to manage any business in competition with the company without the consent of the general assembly.
In addition to amending the types of companies that can now be set up in the UAE, the NCCL introduces a number of new concepts relating to sole shareholder companies (however, given the continuing foreign ownership restriction, this will mainly benefit Emirati and businesses from other GCC countries), employees' incentive share schemes, takeover rules, share pledges in LLCs, prohibition of financial assistance (discussed above) and corporate social responsibility as well as introducing new concepts, such as holding companies, authorised capital and strategic partners.
As a much anticipated legislative development, the NCCL has been broadly welcomed since its publication in March. However, it is clear from the resulting extensive market discussions that the further regulations which the NCCL anticipates, and indeed relies upon, are crucial before the market can truly assess its impact. The companies must also ensure their memorandum of association comply with the NCCL before the current deadline of 1 July 2016, or risk dissolution.