This article was written by Hamish Walton (partner) and Sandeep Dhama (senior associate).
There has been discussion in the UAE for many years about the need for a new Commercial Companies Law (new CCL) to replace the old law (old CCL). Hopes were high that any new law would provide greater flexibility for investors, repeal the old “51/49” foreign ownership restriction, deal comprehensively with corporate insolvencies and create a takeover regime for listed companies, along with removing some of the inefficiencies associated with the old CCL.
The new CCL has now been in effect for several months. We have reviewed the new CCL, and whilst there are some significant improvements over the old CCL in the areas of structure, governance and reporting, it seems that many of the bigger issues have been “parked” for the time being. In addition, it is still unclear how the new CCL will apply in practice.
The new CCL applies to companies (with some exceptions) incorporated in the UAE outside of freezones, and to the registration process for foreign companies doing business in the UAE outside of freezones. Some of the highlights and omissions of the new CCL are set out below.
1. Pledges over LLC’s shares
The new CCL expressly recognises the right of a shareholder in a limited liability company (LLC) to pledge its shares to a third party such as a bank as security for a loan. However, it is not yet clear exactly what the process is for doing so. It will be interesting to see how this is applied in practice. For example, RERA will only permit land to be taken as security by licenced local financial institutions. It remains to be seen what the practice will be for shares and if the Commercial Register will permit anyone to take such security. In addition, when the process for registering the security in the Commercial Register is released, the hope is that it will improve the ability of security takers to ascertain whether shares are the subject of prior ranking securities.
2. Restrictions on foreign ownership
Despite much discussion, the “51/49” rule remains. Currently, a foreign investor cannot own more than 49 per cent of an onshore company’s shares. The position in the new CCL has not changed for the time being, although the Federal Cabinet has been given the express power to change the position. It is reported that this issue was, unsurprisingly, the subject of much discussion when the new CCL was debated. The issue is likely to be dealt with in relation to certain strategic sectors in a new Foreign Direct Investment Law which is reported to be at an advanced stage of approval.
3. Application of International Accounting Standards to Accounts
Under the new CCL, the accounts of a company in the UAE must be drawn up in accordance with International Accounting Standards and Practices. This should mean a level of consistency in the preparation of accounts and facilitate shareholder understanding of a company’s financial status. It should also assist any financial due diligence process being undertaken by a buyer of a company’s shares.
4. Single member LLCs
Under the old CCL an LLC was required to have at least two shareholders. In circumstances where a shareholder was provided with shares for the sole purpose of “making up the numbers”, a complicated set of arrangements was often put in place.
Single member companies are now permitted under the new CCL, which will make the incorporation process and group company structures easier to implement.
5. Extension of JSC provisions
The new CCL contains a provision that extends all of the provisions in the new CCL covering Joint Stock Companies (JSCs) to Limited Liability Companies unless otherwise provided. This is a significant change from the old CCL that only extended liabilities of directors in JSCs to managers in LLCs. The application of this provision has been the cause of much discussion. Generally speaking, JSCs have far more prescriptive provisions than LLCs, so this could have far reaching impact on how LLCs operate. We look forward to clarification on the exact intention of this provision and how far it is likely to extend.
6. Enhanced responsibilities for Managers
Managers of companies are subject of enhanced requirements under the new CCL. They are required to work to protect the company’s rights and work with care for the benefit of the company. In some respects these duties are approaching common law standards applicable to directors. The manager must not compete with the company except with the consent of the general meeting.
7. No change:
- Different types of share classes are not permitted under the new CCL
- The role of the notary in the registration process for companies has been retained.
Five important changes for Public Joint Stock Companies:
1. Significant increase in Corporate Governance for PJSC’s
The new CCL focuses on greater transparency and better corporate governance in the provisions relating to Public Joint Stock Companies (PJSC’s). For example, related party transactions above a certain size are regulated in greater detail and require shareholder approval. Similarly, related parties and company personnel may be prohibited from making unauthorised profits from the use of inside information.
2. Getting round statutory pre-emptive rights: “the strategic shareholder”
The new CCL continues to restrict, subject to certain exemptions, the ability of companies to increase their share capital and issue shares unless they have been offered to existing shareholders (“pre-emptive rights”). However, in respect of PJSCs, entities known as ‘Strategic Partners’ will be allowed to invest in the company, with the approval of a special resolution of the general meeting, without being subject to shareholders’ pre-emptive rights.
Little is known at this stage about the precise details of this Strategic Partner option.
3. Employee share schemes
Another exemption to pre-emptive rights is for employee incentive schemes. With the approval of a special resolution of shareholders, the capital of the company may be able to be increased for the purpose of implementing employee incentive schemes. The board of directors of the company may not participate in the scheme. These schemes can help with staff retention, cash flow and improved performance.
4. IPO’s, Mergers and Takeovers
There has been some relaxation of the rules regulating IPO’s. The minimum free float required is now only 30% instead of 55%, meaning founders can retain control. Bookbuilds (involving the market bidding for the shares pre- IPO and allowing a market price to be set) are now permitted in the manner approved by the relevant authority, which will help to ensure shares are not listed at a discount to their true market price, penalising the founders.
The new CCL provides some further guidance on the merger process, but there is still little guidance on takeovers with rules to be determined at a future date.
5. Financial Assistance
Companies are not permitted to provide financial aid to any shareholder to enable the shareholder to hold any shares, bonds or sukuk issued by the company. A non-exhaustive list of what constitutes financial aid is set out in the new CCL, however this has been a hotly debated area in other jurisdictions and it will be interesting to note if the jurisprudence that has been developed in other jurisdictions will have any bearing on the interpretation by the UAE Courts.
Penalties increased in scale and scope
In the new CCL the penalties that can be imposed for breaches of the law have been given real teeth and are considerably higher than those existing under the old CCL.
Several months on, there are still unanswered questions regarding the applicability and the practice of the new CCL. We understand that Notaries in Dubai have started requiring new constitutional documents to refer to the new CCL, which is a positive step. However, although some of the changes will make life easier, it remains to be seen whether the new CCL will have any significant impact on business activity in the short term.