A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 15, Issue 04 October 2013

Update On UAE Law

BRIEF INTRODUCTION TO THE DRAFT NEW UAE COMMERCIAL COMPANIES LAW

Call it the effect of the ongoing bid for winning the Expo 2020 or simply to keenness to introduce more relevant legislation that will drive the economy forward, the draft UAE Commercial Companies Law (CCL), approved by the UAE Federal National Council in May 2013, is a step in the right direction. It may not be a crowd-pleaser as yet, but the draft legislation when it translates into law, is definitely an effort to attract more business to the golden shores of the UAE.

The stated objective of the New CCL is to continue the UAE’s development into a global standard market and business environment, particularly in relation to corporate governance, the protection of the shareholders and promotion of social responsibility of companies. Despite the steadily increasing rumors, the new CCL does not talk about any amendment in the foreign investment rules. As a result,foreign ownership is restricted to 49% in all sectors. However, it is widely expected that a Foreign Investment law will be rolled out in the near future to tackle this issue.

Some of the key amendments which have been suggested in the draft released earlier this year are discussed below:

General Provisions

  • Free Zone Companies
    Status quo has been maintained, in the sense that where specified under the regulations of the relevant free zone, free zone companies remain exempt. The New CCL seeks to bring further clarity to the application of the on-shore regime to free zone entities. It is expected that there will be a cabinet decree that will set out the conditions that should be followed for registering free zones companies, where such companies wish to operate either onshore or outside the borders of the free zone.
  • Corporate Governance
    In a clear move to boost investor confidence, the New CCL contains provisions which strengthen the current CCL’s corporate governance regime in line with wider developments in the UAE’s corporate governance framework. The New CCL provides that private joint stock companies will be subject to corporate governance rules, if such companies have more than 75 shareholders. A ministerial decree setting out the applicable corporate governance rules is expected in due course. The expected rules will include financial penalties on board members, managers and auditors of any defaulting company(ies).
  • Sole Shareholder
    The new CCL introduces the concept of incorporating a company with a sole / single shareholder. This applies to private joint stock companies and limited liability companies. This concept seems similar to the one followed by most free zones in the UAE, where single shareholder companies (also called free zone establishments in some free zones) are allowed to be formed.
  • Books of Account
    Companies must retain their accounting books for a period of not less than five years from the end of each financial year. This provision was not a part of the existing CCL. Previously, entities would seek guidance from the UAE Commercial Transactions Law for ascertaining the number of years for which financial records were to be retained by companies.
  • Financial Year
    Each financial year should not be less than 6 months and may not exceed 18 months.
  • Public Offering of Shares
    Any entity, whether onshore or in any of the free zones, is explicitly prohibited from inviting the general public to subscribe for their shares without obtaining the prior approval of Securities and Commodities Authority (SCA).
  • Prohibition on Liability Exclusion
    The New CCL introduces an explicit clause voiding any provision in the articles of any company allowing the company or any of its subsidiaries to agree to exclude any person from their current or previous liability towards the company. The clause prohibits the exclusion of liability in general without limiting the exclusion to liability arising out of gross negligence or willful misconduct, as provided under the UAE Civil Code.

Provisions relating to Limited Liability Companies (LLCs)

  • Pledge of Shares
    The New CCL provides that limited liability shareholdings may be pledged. This development may provide a degree of comfort to the beneficial owners of shares vis-à-vis their relationship with the local nominee shareholder.
  • Number of Managers
    There is no limit on the number of managers under the new CCL. The previous limit was 5.
  • Non-Compete Provision
    There is a new non-compete provision under the New CCL, whereby a manager and/or director of a company may not be allowed to hold any management position or operate any business in competition with the business of the company in question (without the consent of the general assembly). Defaulting manager(s) will be discharged and required to compensate the company accordingly. This matter was not addressed under the existing CCL.
  • General Assemblies
    1. Invitations to general assemblies need to be sent out 15 days before (previously 21 days) the date of the meeting or less than 15 days if all partners agree.
    2. General assemblies will not be valid unless attended by partners owning 75% of the capital of the company. If the quorum is not satisfied in the first meeting, the second meeting shall be called for within 14 days from the first meeting, which shall not be valid unless attended by partners owning 50% of the capital of the company.  If the quorum is not satisfied in the second meeting, a third meeting shall be called for after the lapse of 30 days from the date of the second meeting, which shall be valid regardless of the quorum at such meeting.

Provisions Relating to Public Joint Stock Companies (PuJSC)

  • Founders
    1. PuJSC may be established by a minimum of five founders (previously 10)
    2. Founders’ committee shall have at least three members without any maximum limit. (Previously, the committee had between 3-5 members)
    3. Founders may own a minimum of 30% and a maximum of 70% of the capital of the company. (Previously, between 20% to 45%)
    4. The founders’ lock-in period of two years has been retained.
  • Underwriters
    Underwriters certified by SCA may be appointed on an IPO and subsequent capital raisings. This is the first time that the role of underwriters has been acknowledged by the lawmakers. It is a sign that regulations could soon be issued to govern activities of underwriters, and may lead to attracting global financial institutions to act as underwriters in the UAE capital market.
  • Book Building
    SCA may permit and regulate subscriptions by way of a book build. The new CCL refers to a book building mechanism in relation to the pricing of newly issued IPO shares. The detailed regulations governing and regulating book building will be issued later. Pricing is to be determined at the discretion of the issuer and the banks at a valuation that is acceptable to investors, the issuer and the selling shareholder(s).
  • Board of directors / Board Members
    1. Board of directors should be composed of a minimum of 3 and a maximum of 11 members (existing law – minimum of 3 and maximum of 15 members)
    2. Majority of board members, and the Chairman, should be UAE nationals.
    3. The board of directors shall meet at least four times a year
    4. Provides for cumulative voting at any election of board members. This should increase the chances of minority shareholders achieving board representation.
  • Share Capital
    1. Provides that the issued capital of a PuJSC shall be not less than AED 30 million (previously AED 10 million). In addition, the company may decide to have an authorized capital which may not exceed twice the value of the issued capital. The concept of authorized capital was not discussed in the previous CCL.
    2. The general assembly has the right to authorize the board of directors to execute the capital increase resolution, provided that the board will execute the capital increase resolution no later than one year  (previously 5 years) from the date of the general assembly’s resolution.
    3. Shareholders have pre-emptive rights to subscribe for their company’s rights Issue. Shareholders are now allowed to sell their entitlements under the rights issue to other existing shareholders or to third parties (previously this was not allowed).
    4. Nominal value of the share is to be paid within 3 years from the date of incorporation (previously 5 years).
  • Financial Assistance
    The New CCL prohibits companies from providing financial assistance to any shareholder to subscribe or buy its shares or bonds.
  • Strategic Investor
    Companies are allowed to increase their capital and allot the newly issued shares to a strategic investor without applying the pre-emption rights of the existing shareholders to subscribe for the capital increase in question, provided that the strategic investor carries out similar or complementary activities to the company.
  • Conversion of Debt to Equity
    The new Law explicitly states that a company may convert its debt to equity which is not covered under the existing law.
  • Employees Share Scheme
    The New CCL explicitly addresses the possibility of issuing employees incentive share scheme. SCA will issue regulations pertaining to employees share scheme. This is not covered under the existing law.

Provisions Relating to Private Joint Stock Companies (PrJSC)

  • Incorporation
    1. Not less than 2 founding members may incorporate a PrJSC (previously 3) however a sole shareholder may also set up a PrJSC.
    2. Minimum capital requirement is AED 5 million (previously AED 2 million).
    3. There is a minimum shares lock in period of 1 year from date of incorporation (previously 2 years).
  • New Corporate Status
    The New CCL sets out a new set of rules that governs new corporate legal structures such as, holding companies and subsidiaries. In addition, it addresses investment funds for the first time. A new set of rules and decrees will soon be issued to regularize these new legal structures.

    The concept of a “Holding Company” has been introduced and can be incorporated as either a private JSC or a LLC. Permitted objects for a holding company are limited to –

    1. holding shares or stocks of PrJSCs and LLCs and managing those companies;
    2. providing loans, guarantees and finance to its subsidiaries;
    3. acquiring the assets required to commence the group’s activities; and
    4. acquiring certain industrial and IP rights for use by its subsidiaries.

    A subsidiary cannot hold shares in its holding company.

Conclusion

A step or leap in the right direction, but without the push for amending the foreign investment rules, most prudent investors are likely to take a wait and watch view towards the New CCL. There is a definite shift whereby a more global best practices approach seems to have been adopted by the lawmakers. However, if the New CCL is expected to boost the UAE capital market, clarity on key amendments pertaining to LLCs and PJSCs will hold the key, along with the much anticipated Foreign Investment Law. The more pragmatic investor would do well to note that LLCs may be subject to the same obligations as JSCs once the 2013 draft CCL in its current form becomes law.

(This article is compiled by Mr. Chaitanya G. Kirtikar, Manager, Offshore and Free Zone Services)