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  • Impact of the New UAE Commercial Companies Law – What Businesses Should Know
Article:

Impact of the New UAE Commercial Companies Law – What Businesses Should Know

29 March 2022

To commemorate the UAE's 50th anniversary, the country enacted a series of important legislative amendments to consolidate the country's status as global trade and economic centre. The issuing of Federal Law by Decree No. 32 of 2021 on Commercial Companies ("New Law"), which went into effect on 2 January 2022, is one of these revisions. In addition, 2021 repealed the preexisting Commercial Companies Law, being Federal Law No. 2 of 2015 ("Old Law").

This is a practical step toward improving the United Arab Emirates' competitiveness in the context of economic development, demonstrating to the rest of the world the country's ability to keep up with international standards and best practices, thereby stimulating existing businesses and attracting new investments.

Special Purpose Acquisition Company (SPAC): These companies come under the larger head of public joint-stock companies (PJSC- more than one proprietor). SPAC is any company, which is used for acquiring and merging companies. The Securities and Commodities Authority (SCA) will give the changed laws for regulating and implementing SPAC's under the New Law.

The SPAC was introduced along with regulations regarding to the split of Joint Stock Companies, with the aim of providing greater flexibility to public offers, spin-offs, mergers, and demergers.

Special Purpose Vehicle (SPV): This is a company formed to separate the assets and responsibilities of a financing transaction from the parent company's assets and responsibilities. Such 'vehicles' will be used in bond issuances, debt capital, market transactions, and credit transactions.

The SPV's structure is similar to the Dubai International Financial Centre's (DIFC) Prescribed Companies, which can be utilised as an investment holding company in larger transactions, financing, or asset holding arrangements. Accordingly, the SPV is likewise exempt from the New Law and will be governed by the SCA once the necessary regulations are issued.

Limited Liability Companies have received a major overhaul under the new amendment. Some of the important changes are as follows.

Memorandum of Association: Alternative dispute resolution mechanisms (such as arbitration, negotiation, etc.) must be stated explicitly in the Memorandum of Association to address any company business-related disagreements that may emerge between the company and the shareholders; Chairman, or managers.

Powers of the Manager: If a manager's term expires without him/her being replaced, the term may be prolonged for up to six (6) months until the appointment of the new manager.

General Assembly Meetings:

  • At a general assembly meeting, a substitute person can represent a shareholder as long as they are not a managerial staff.
  • The period for notice to summon a general assembly has become a minimum of twenty-one days as compared to the 15 days in the Old Law.
  • When an officially called meeting is not enough and a second meeting is called, the second meeting will have no minimum requirement and the meeting will be presumed validly constituted, can change if MOA says differently.

Statutory Reserves: The statutory reserves, which consists of net profits, have been cut from ten per cent to five per cent; the New Companies Law states that if the legal reserve of fifty per cent (50%) of the share capital is met, shareholders can discontinue this allocation.

Appointment of Supervisory Board: When a company has more than 15 shareholders (previously seven), it must appoint a Supervisory Board of at least 3 shareholders to oversee the company's annual reports, budgets, and profit distribution, as well as supervise LLC management and submit a report to the General Assembly.

Expiry of Term of Board of Managers: In case if the time period of the Board of Managers expires without electing a new board of managers, the present board will operate the company for six more months, after which the company must appoint a new board. If the company fails to do so, the Department of Economic Development may intervene and establish a board for up to one year, after which the company must appoint a new Board of Managers. As a result, the DED's nomination of the Board of Managers is a temporary arrangement that will be formalised if the company fails to appoint a new board of managers.

The operations and guidelines pertaining to Public Joint Stock Companies have also undergone changes under the New Law, with the major changes being:

Director's Remuneration: This is restricted to a maximum of 10% of the financial year's net income (calculated after depreciation and reserve deductions). A board member may be given a lump sum fee not exceeding AED 200,000 at the conclusion of the financial year if the firm has not made profits for that year; this may change by the company's constitutional documents and approval by the General Assembly.

Replacement of Director: If a director resigns before the end of their term, the board has the authority to appoint a substitute within 30 days, who must be introduced to the General Assembly at its first meeting for approval or to appoint someone else. If the new director is approved, he or she will serve the remainder of the prior director's term. If the board fails to appoint a director during the time allotted, the board must hold an election to elect a new director at the first meeting of the General Assembly, and the newly chosen director will serve for the remainder of the predecessor's tenure.

Requirements for Contributions from the Founders': The New Companies Law has repealed the minimum and maximum percentages of capital whereby the founders of a Public Joint Stock Company may subscribe to additional shares upon public sale. Rather than being obligated to subscribe to a minimum of 30% and a maximum of 70% before the invitations to the public subscription, the founders may now subscribe to new shares up to the percentage specified in the prospectus and subject to the SCA's requirements.

Conversion to a Public Joint Stock Company: The New Companies Law no longer needs a 10% net operating profit test in the two years before the conversion application.

Sale of Part of Public Joint Stock Company Shares during Conversion: The proportion of shares that can be offered for sale while converting from a private joint-stock company to a public joint-stock company is no longer limited by the New Companies Law (the maximum limit on a sale of shares was set at 70 per cent under the Old Companies Law). The SCA will now determine the proportion of the total sale shares and new shares being issued as part of an IPO on conversion.

Changes to Founders Share Trading Rights: The founders of a PJSC are no longer restricted from selling their shares after the converted business is listed, as per the New Companies Law. Moreover, the founders of a PJSC are no longer confined from trading their shares after the converted business is listed.

Changes to Subscription Period:

  • There is no longer a mandatory minimum duration for the general public to subscribe for shares in an IPO (10 days in the Old Companies Law), and the term now refers to the period mentioned in the companies' prospectus, which cannot exceed 30 working days. On application to the SCA, the subscription period for the IPO may be prolonged for an extra period, but not beyond the final date set forth in the prospectus. This changes the Old Companies Law's stringent stance, which prohibited any extension to 10 business days.
  • After the subscription time has expired, the founders of a PJSC may subscribe for any unsubscribed shares in the listings offered, subject to SCA restrictions. Previously, the founders were only able to subscribe for up to 70% of the shares, and if there were any remaining unsubscribed shares, the PJSC's formation would be cancelled.
  • Additionally, the New Companies Law eliminates the prohibition on PJSC founders trading their shares after the converted PJSC is listed.

Issuing Discounted Shares: A PSJC can now issue shares at a discount if the market price of the shares drops below the nominal value, subject to SCA permission and the adoption of a special resolution.

Nominal Value of Shares: The value of a PJSC's shares can now be specified. As a result, you are no longer limited to a minimum of AED 1 and a maximum of AED 100. The nominal price of shares is currently determined solely by the Articles of Association.

Division of a PJSC:

  • Under the New Law, a PJSC can divide certain of its assets, liabilities, rights, and obligations
    • Horizontally - in which the same shareholders own directly the shares of the resulting company pro-rata to their shareholding in the parent company; or
    • Vertically - in which the shareholders of the parent company own the new shares through the new division subsidiary.
  • These provisions intend to further facilitate spin-off and demerger transactions.

To increase the flexibility of the national economy and assist it, recently amended the Commercial Corporations Law, removing the requirement for investors and global companies intending to operate a branch within the country to have a State agent.

This also helps in raising the attractiveness of the State's investment environment to world-leading levels, through openness and flexibility in legislation to provide an economic climate in accordance with the best trends and modern investment practices, and in keeping with the State targets for the next 50 years.

The activities are available for full or partial foreign ownership by licensed companies, and existing companies can amend their status.

  • The status of existing business licenses that includes an Emirati partner remains unchanged as per the Memorandum of Association (MOA) and the partners' decision. According to the legal procedures followed, It is possible for the Emirati partner's percentage share to be reduced from 51 per cent or for him to resign from the partnership.
  • Other than changes like having an Emirati partner or declaring a fixed quota ratio for him/her is no longer required, full ownership makes no changes to current licensing procedures or criteria. The guidelines also say that full foreign ownership does not require any additional fees, guarantees, or cash.
  • Dubai Economy also explained that though it is currently not possible to change a company's legal form from LLC (Limited Liability Company) to Sole Proprietorship under a foreign name, the license can be transferred to a one-person limited liability company.
  • Foreign companies branches do not require an Emirati agent anymore.
  • More than 1,000 commercial and industrial activities are eligible for 100 per cent foreign ownership, with the exception of economic activities with a strategic influence, which are limited to seven sectors.
  • Commercial agencies are exempt from full ownership since they are governed by the Commercial Agencies Law.

The New Law pertaining to Commercial Companies has laid the groundwork for an influx of investment and has simultaneously prepared the pre-existing flexible investment environment to suit the needs of future businesses in the region. With the establishment of new corporate vehicles such as Special Purpose Acquisition Company and Special Purpose Vehicle, prima facie, corporate transactions such as asset holding arrangements, mergers and demergers, public offers, etc., will see a rise due to the newly formed regulations creating a positive environment for the same. Lastly, the removal of the mandatory requirement of having an Emirati Partner for Limited Liability Companies, will ensure that both, established and new businesses, are able to flourish in line with the targets set by UAE for the next 50 years.