Following several years of discussion, consideration and preparation, the new Commercial Companies Law 2/2015 was issued on March 25 2015 and came into force three months following its issuance date, repealing the old Commercial Companies Law 8/1984.
According to the government, the new law provides up-to-date regulations for the corporate landscape and the investment community which will help to stimulate investments and protect investors, as clearly stipulated under Article 2.
Although the new law maintains the cornerstones of the old law, it introduces some fundamental provisions that must be observed carefully by existing companies and investors, as well as by those considering setting up companies or investing in the United Arab Emirates. According to Article 374, all commercial companies operating in the United Arab Emirates must adjust their positions to comply with the new law within one year of its effective date.
This update provides an overview of the main provisions of the new law and sets out the consequences which companies might face if they failed to comply with its provisions.
In order to grant flexibility to companies owned (either entirely or partially) by the federal government or the local government of any of the emirates, the legislature has exempted companies that are fully owned by the government and those operating in the oil and energy sector in which the government holds 25% or more of the company's share capital from the new law.
Further, the exemption provisions under the new law include companies that were already exempt under the old law and those that may be exempted pursuant to a resolution issued by the UAE Ministers' Cabinet, provided that the memorandums and articles of associations of such companies provide for such exemption.
Therefore, all such companies should ensure that their respective memorandums and articles of association are amended to contain all the necessary provisions for exemptions and assess whether these exemptions will be granted to the company in its entirety or only provisions therein. Amendments to the memorandums and articles of associations must be executed within one year from the effective date of the new law in order to avoid being subject to any penalties.
The new law eliminates two of the seven forms of commercial company that may be registered in the United Arab Emirates – joint venture companies and share commandite companies. The remaining five forms of commercial company permitted are:
- joint liability companies;
- simple commandite companies;
- public joint stock companies (JSCs);
- private JSCs; and
- limited liability companies (LLCs).
Any company that does not adopt one of these five forms will be null and void and the parties contracting in the name of such companies will be personally and jointly liable for any and all of the liabilities derived therein (Article 9).
Notwithstanding the above, the elimination of joint venture companies is unlikely to have a major negative impact on existing joint venture arrangements because the majority of the incorporated joint ventures are incorporated as LLCs.
The main provisions relating to LLCs in the old law are maintained by the new law. However, the new law makes several positive changes which can be summarised as follows:
- According to Article 71 of the new law, an LLC can be incorporated in the United Arab Emirates by as few as one natural Emirati shareholder. According to the local authorities in Dubai, this provision will also likely apply to Gulf Cooperation Council (GCC) nationals, based on the treaties signed between the GCC countries.
- In the past, there was considerable debate as to whether the shares of an LLC could be pledged in the United Arab Emirates. Article 79 of the new law expressly permits the pledge of an LLC's shares, although several critical matters remain unclear in connection with the pledge of shares – mainly relating to the actual registration process of the pledge. A specific committee is in the process of being incorporated for such purposes and will be responsible for examining all applications made for the pledge of shares. Further, the registration of pledges will still be restricted in favour of banks and financing institutions.
- The provisions relating to the pre-emption rights have been slightly modified under the new law. Under Article 80, a shareholder intending to sell its shares in an LLC must disclose the name of the intended purchaser of the shares, as well as the terms of the sale (including the purchase price) to the other shareholders. In addition, in the event of a dispute over the price or value of the shares being sold, an expert (or more than one) will be appointed by the authorities (pursuant to a request made by the shareholder exercising such right) to determine the value of the shares.
- The restriction imposed on the number of managers appointed for an LLC under the old law has been lifted pursuant to Article 83 of the new law. As such, shareholders can nominate one or more managers for the management of the company, as appropriate.
- The required notice period for general meetings has been reduced under Article 93 from 21 days to 15 days or less, provided that all of the shareholders' agree.
- The statutory quorum required for general meetings has been increased from 50% to 75% (Article 96). However, if the quorum is not met, the shareholders should be called for a second meeting, which must be convened within 14 days of the date of the first meeting. The quorum required for a second meeting will be met if shareholders holding no less than 50% of the company's shares are present. Failing this, a third meeting should be called 30 days after the date of the second meeting, which will be validly convened with the shareholders present at the meeting. The resolutions passed during the third meeting will be valid if approved by the majority of shareholders (or their authorised representatives) present at the meeting.
The new law introduces key provisions affecting JSCs, including the following:
- A new type of resolution for the general assembly of JSCs has been introduced – the so-called 'special resolution' – which is defined in Article 1 as a "resolution issued by a majority of shareholders holding at least 75% of the shares represented in the general assembly". Further, the new law has made the following decisions issuable by resolution of the general assembly of a JSC:
- increasing or decreasing its share capital;
- altering the company name;
- amending its memorandum of association and articles of association;
- extending its term;
- granting certain authorities to its board; and
- issuing bonds or sukuks.
- The minimum number of founding partners required for private JSCs has been reduced from three to two partners (however, Article 255 contains an exemption to this by providing that a single corporate entity may incorporate a private JSC) and from 10 to five founding partners for public JSCs (the federal government, any local government and any company fully owned by any of them are exempted from this pursuant to Article 107. The exemption in this article also includes companies converting into public JSCs).
- According to Article 117 of the new law, the minimum and maximum limits for the subscription of the founders of a public JSC have been increased to 30% and 70%, respectively.
- The new law also gives the Securities and Commodities Authority the right to issue a resolution in order to regulate the mechanism of subscription in new shares on the basis of book building (Article 129). This is based on supply and demand by effectively letting the market set the price for new shares by assessing the demand at various price points and then letting the issuer set the price for the initial public offering at a comfortable level.
- The cap on the number of board members of a JSC has been reduced from 15 members to 11 (Article 143).
- The minimum notice required for convening a general assembly meeting has been reduced from 21 days to 15 days (Article 172). However, a shorter notice period may be given if it is approved by shareholders holding no less than 95% of the company's share capital.
- A JSC's board of directors must call for a general assembly meeting if requested by one or more shareholders holding 20% of the company's share capital or a lesser percentage if stipulated for under the company's articles of association (Article 174). Under the old law, this obligation was subject to a request being made by at least 10 shareholders holding at least 30% of the company's capital. Notably, the new law has eliminated the references to ordinary and extraordinary general assembly meetings and referred to all the shareholders' meetings as the general assembly.
- Although the new law maintains the old law's minimum statutory quorum requirement for the general meeting of a JSC (shareholders holding at least 50%), the period during which the second meeting must be called for has been reduced from 30 days to 15 days (but no less than five days). If the quorum was not present during the first meeting, the second meeting will be validly convened irrespective of the number of shareholders present at the first meeting (Article 183).
- The minimum share capital requirement has been increased from Dh2 million to Dh5 million for private JSCs and from Dh10 million to Dh30 million for public JSCs. Pursuant to Article 193, public JSCs are now permitted to have both issued share capital and authorised share capital, provided that the authorised share capital does not exceed two times the issued share capital.
- The shareholders' pre-emption rights can now be sold to other shareholders or third parties with a material consideration (Article 197). This article also grants the Securities and Commodities Authority the right to issue a resolution in order to regulate the conditions and procedures of selling such rights.
- Although the restriction imposed on issuing different classes of share remains unchanged, Article 206 of the new law grants the cabinet the right to issue a resolution determining other classes of share issuable by public JSCs and the conditions required for issuing such shares, the rights and obligations arising from them and the rules and procedures regulating them.
- The new law has prohibited public JSCs from providing shareholders with financial assistance in order to enable them to hold any shares, bonds or sukuk issued by the company, whether in the form of a loan, gift, donation, security or guarantee (Article 222).
- The new law also introduces a new term called the 'strategic shareholder', defined in Article 1 as "such shareholder whose contribution to the company provides technical, operational or marketing support to the company". Article 223 provides that a company may, pursuant to a special resolution, increase its share capital by the entry of a strategic shareholder. The Securities and Commodities Authority has the right to issue a resolution with a view to determine the conditions and procedures required for the entry of strategic shareholders.
- The appointment of JSCs' auditors has been capped at three consecutive years (Article 243).
- Any party (whether an individual or a company) intending to take any action that may lead to acquiring shares or any securities that are convertible into stock in the shares of a public JSC which has offered its shares for public subscriptions or is already listed must comply with the resolutions issued by the Securities and Commodities Authority regulating the rules, conditions and procedures for such acquisition (Article 292). However, to date, no such resolutions have been issued by the authority.
Sharia controllers, committees or boards (which usually exist in companies operating or conducting their businesses in accordance with Islamic Sharia principles) were never properly or sufficiently regulated in the United Arab Emirates. As such – and due to the rapid increase in the number of companies either being incorporated as Sharia-compliant entities or converting their status into Sharia-compliant entities – the legislature (through Article 11) gave the cabinet the right to issue a resolution on the guidelines under which members of internal Sharia control boards or committees must operate, with the view to conducting their businesses or operating in accordance with the provisions of Islamic Sharia. The resolution is also expected to set standards based on which these boards or committees will operate.
The new law restricts the appointment of Sharia boards and committees to the general assembly (this applies to both LLCs and JSCs, according to Articles 94 and 132, respectively). As such, Sharia boards and committees must submit their reports to the annual general assembly of the company for ratification (Article 177(1)). This will need to be carefully considered by all existing companies operating in accordance with the principles of Islamic Sharia, as several companies have already granted their board of directors the right to appoint their Sharia board or committee members, which were also expected to report to the board of directors.
The new law introduces several new penalties which all companies and their management must consider and observe, including the following:
- A penalty of no less than Dh10,000 and no more than Dh50,000 will be imposed if a company refuses to disclose to any shareholder or partner any of the minutes of the shareholders meetings, the company's records or documents (Article 342).
- A penalty of no less than Dh50,000 and no more than Dh100,000 will be imposed on the chair of a listed company if he or she fails to call for the annual general meeting within the period stipulated under the law (Article 343).
- A penalty of no less than Dh50,000 and no more than Dh1 million will be imposed on the chair of a listed company or LLC if the company's losses reach half of its share capital and he or she failed to convene a general meeting (Article 344).
- A penalty of no less than Dh10,000 and no more than Dh50,000 will be imposed on the Sharia controller or each member of the Sharia board or committee if they failed to comply with the resolution to be issued by the cabinet referred to above (Article 351).
- A daily penalty of Dh2,000 will be imposed on any company that fails to amend its memorandum of association and articles of association in compliance with the new law within the one year of the effective date of the new law (Article 357).
- A penalty of no less than Dh10,000 and no more than Dh100,000 will be imposed on anyone (or any company) that violates the new law (Article 360).
- The new law also increases the penalty imposed on any person that, in bad faith, assess the value of the in-kind shares provided by the founders or shareholders in excess of their actual value. According to Article 362, the penalty will be been between Dh500,000 and Dh1 million and/or imprisonment between six months and three years.
In addition to the above penalties, the new law has imposed imprisonment penalties in certain cases, such as:
- providing misleading information to the competent authorities;
- breaching confidentiality;
- over valuating shares in kind;
- distributing profit in violation of the new law; or
- concealing the true financial position of the company.
The period granted for companies incorporated and operating under the old law to comply with the new law will expire at the end of June 2016, although it could be extended if a resolution is issued by the cabinet based on a recommendation from the minister of economy. Any company that fails to comply with the new law will be considered dissolved, in accordance with Article 374(2).
The significant amendments made by the new law and the provisions relating to the legal framework governing commercial companies in the United Arab Emirates are likely to assist the new law in achieving its objectives. However, some provisions of the new law will not achieve their objective until all of the necessary regulations, rules and resolutions are issued by the other relevant authorities, such as the Ministry of Economy and the Securities and Commodities Authority.
In the meantime, it is paramount for all existing companies, their shareholders and managers to review the new law and familiarise themselves with its provisions and obligations, and to take all necessary steps to amend their memorandum of associations and articles of associations appropriately within the stipulated timeframe.
For further information on this topic please contact Mojahed Al-Sebae at Galadari & Associates by telephone (+971 4 393 7700) or email (firstname.lastname@example.org). The Galadari & Associates website can be accessed at www.galadarilaw.com.
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