16 February 2021
On the 27 September 2020, Federal Law No.26 of 2020 (the Decree Law) was published in the official gazette and came into force on the 2 January 2021. The changes to the Commercial Companies Law (CCL) are broad and wide-ranging, modernising both foreign direct investment and the efficiency of companies’ management in the UAE. We have reviewed the changes under the Decree Law and have outlined several key aspects which will benefit the business community.
One of the most significant developments is the abolishment of Article 10 of the old CCL. Previously, if you wanted to set up a company in the UAE, you were required to have, “one or more UAE partners holding at least 51% of the share capital of the company”. This provision effectively capped the level of foreign ownership at a a 49% shareholding of a limited liability or joint stock company established onshore in the UAE.
Following the CCL’s amendment there is no longer a general legal requirement for a UAE partner to hold a majority stake in an onshore company. On federal law level there is now a lot more scope and flexibility for a foreign investor to establish a company in the UAE. The new Article 10 of the CCL now only provides for a committee to be established (the Committee), which will decide on strategically important activities and then determine the controls for licensing the companies that undertake any of these activities.
Taking decisions of the Committee into account going forward the Departments of Economic Developments in each respective Emirate will be in charge for determining “a certain percentage for the contribution of nationals to the capital of a company, or the boards of directors of all companies”, and approving the applications for the incorporation of companies.
In other words, your onshore company will only require a UAE national partner to hold shares or to be a director if the Department of Economic Development in the Emirate where your company is registered includes the business of your company into the list of any restricted activities. With the previously mandatory minimum 51% local ownership requirement being abolished, any continued local ownership requirement determined by the authority in each Emirate could also be less than 51%, opening the option for a foreign investor to own the majority of the share capital in a company and a UAE partner being a minority shareholding partner.
As per Article 4 of the Decree Law, you have a one-year transition period, starting on 2 January 2021 and amendments to foreign ownership and the removal of local service agents will not come into force until six months from the publication of the Decree Law in the Official Gazette i.e. March 2021.
Under Article 93 of the Decree Law, the minimum notification period for the invitation to the General Assembly of a limited liability company has been extended from 15 days to 21 days.
Further, under the new CCL, now shareholder(s) holding at least 10% of the limited liability company’s capital have the right to request for a General Assembly to be conveyed. This is a significant improvement of the protection of minority shareholders, as previously, under the old law, such right was only given to shareholder(s) holding at least 25% of the shares.
Another significant aim of the Decree Law is to reflect the modern way in which UAE companies do business. Following the amendments, the CCL now allows you to notify the shareholders about the invitation to a General Assembly through “modern technological means of telepresence” if the company’s Memorandum of Association allows such communication. Also as a shareholder, or other party invited, you can now participate in General Assemblies by way of modern technology means of telepresence, meaning that you can join in a General Assembly online, without all parties having to be physically present in the same place.
Also, the quorum for convening General Assemblies has been reduced from 75% of the capital to be represented to 50% of the company’s shareholders being sufficient, unless the company’s memorandum of association specifies otherwise, and the timeframe for an adjourned meeting has changed from 14 days from the first meeting to within 5 to 15 days from the date of the first meeting creating greater flexibility for decisions to be made by the shareholders.
Under the Decree Law, if you hold at least 5% of the share capital, then you have the right to list or add additional items to the agenda of General Assemblies. The old threshold was set at 10%. The changes allow increased participation and engagement from the company’s minority shareholders as it provides them with an opportunity to contribute to the running of a company.
The Decree Law has introduced a new Article 101 regarding increasing the capital of the company. The Decree Law introduces a mechanism for any shareholder to obtain a court order to increase the share capital of a company to protect it from liquidation or to settle debts owed to a third party.
Under Article 101, if you increase the capital and any shareholder is not able to settle the obligations resulting from the increase, any other partner in the company, has the right to settle the obligation on their behalf and a number of shares, equal to the amount paid, will be accounted to the partner who assisted with settling the obligation.
The requirement that the chairman and majority of the members of the board of joint stock companies (“JSC”) must be UAE nationals has been removed. Under the new law, the Committee will consider whether you require UAE national involvement on a case by case basis. If the Committee find that national involvement is required, the JSC has an obligation to rectify any deficiency within three months of being notified.
In addition, if you wish to convert your company into a Public Joint Stock Company, as per the new Article 279 of the CCL, the maximum free float requirement has increased from 30% to 70% of the company’s share capital.
Further benefits to PJSC include the fact that Article 234 of the CCL, outlining pre-emption rights for bonds and sukuk has been removed for convertible bonds and sukuk, giving you more flexibility as a potential investor.
One of the significant benefits of free zones is that they allow you, as a foreign investor, to wholly own a company in the UAE. However, even without this benefit, free zones still offer valuable advantages such as:
With that in mind, it is highly unlikely that free zones will disappear from the landscape of the UAE. However, once the rules around relaxed foreign ownership restrictions become clearer it is likely that for some investors an onshore setup will become more appealing.
If the shareholders in your company wish to consider how they can benefit from any of the amendments introduced by the decree Law, or if you wish to update your company’s memorandum of association to reflect the new requirements for management aspects and/or with regards to general assemblies, you may wish to start dialogue with all your shareholding partners. Our corporate team at Taylor Wessing LLP (Dubai Branch) are happy to provide more guidance and support negotiations in this regard.