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Effects of the New UAE Company Law, Federal Law No. 2/2015

Guiding Principle

On July 1, 2015 the long-awaited new UAE Commercial Company Law, Federal Law No. 2 of 2015 (New CCLaw) has taken effect and replaced the existing Federal Law No. 8 of 1984 concerning Commercial Companies (Old CCLaw).

The overall purpose of the New CCLaw is set out in Article 2. The New CCLaw:

“aims to contribute in the development of the business environment and the capacities of the state and its economic standing by organizing the companies in accordance with the global variables, especially those related to the organization of governance rules and the protection of the shareholders and partners as well as supporting of the flow of foreign investment and promoting the social responsibility of the companies”.

The New CCLaw comes with significant changes. For example: Registered companies have a deadline until June 30, 2016 to amend their existing memoranda and articles of association to incorporate changes set forth by the new law. The non-compliance with these new requirements will be catastrophic: Art. 374 New CCLaw states:

“if a company fails to comply […], the company shall be deemed as dissolved in accordance with the provisions of this Law.”

This Article highlights the relevant changes, which will have to be implemented by UAE-LLCs and their partners as well as Branches and Representative Offices and Free Zone Entities to comply with the new law. The obligation to comply with the implementation goes hand in hand with new aspects for new business opportunities and new corporate concepts.

A. General Legal Provisions:

I. Scope of Application of the New CCLaw (Art. 3-5 New CCLaw)

1. Companies Governed by the New CCLaw (Art.3)

The provisions of the New CCLaw and all its Regulations, Instructions and Resolutions issued in execution hereof apply to companies established in the UAE including foreign companies that have a registered place to conduct any activity or have established a branch or representative office.

2. Companies Exempted From the New CCLaw (Art.4 New CCLaw)

Exemptions are governed by Art.4 of the New CCLaw:

  1. Companies excluded by a Resol-ution by the Cabinet;
  2. Companies fully owned by the Federal or any Government of any Emirate;
  3. Companies of the Federal Gove-rnment and/or of the local Gove-rnment of an Emirate or where they have an interest in;
  4. Companies excluded from the provisions of the Old CCLaw, as amended, prior to the effective date of the New CCLaw.
  5. Companies excluded from the provisions of this Law under special Federal Laws.

Conclusion: Hence, the New CCLaw applies to virtually all legal entities with foreign participation that conduct any kind of business in the UAE. Certain entities as described in para.2. above are exempted from the application of the New CCLaw. This raises the question, which law is supposed to be applied instead, given that the Old CCLaw has been replaced and is no longer in force. It will be interesting to see how this legal void will be filled going forward.

3. Companies Operating in Free Zone Companies (Art.5 New CCLaw)

The New CCLaw does not apply to companies established in any of the free zones of the UAE if a special provision to this effect is contained in the laws or regulations of the relevant free zone. However, the New CCLaw shall govern even free zone companies if such free zone laws or regulations permit to conduct the activities of such companies outside the free zone in the territory of the UAE (which, at present, free zone regulations rarely do). Consequently, if the free zone rules and regulations do allow the activities to be conducted onshore and if the free zone company wishes to make use of this option, the New CCLaw applies. All free zone entities should contact the free zone authority to make sure that they are not affected.

Conclusion: This provision seems to be a welcome step to allow business of free zone companies onshore. It further implies the possibility to circumvent the 51:49 ownership rule by establishing a free zone entity under full foreign ownership and which can conduct its activities on the mainland. However, it is still yet unclear how this shall be implemented as in practice the Cabinet must still issue the required Resolution determining the applicable conditions to register such free zone companies to conduct their activities in the UAE outside the free zones.

II. Company Structure:

1. Legal Form:

a) Forms of Companies (Art 9 New CCLaw):

The New CCLaw retains – unlike the DIFC-Rules – the usual common forms of corporate entities:

  • Joint Liability Company,
  • Simple Commandite Company,
  • Joint Venture Company,
  • Limited Liability Company,
  • Public Joint Stock Company,
  • Private Joint Stock Company.

The New CCLaw further applies the concept that a company must be profit orientated. Therefore, the establishment of non-profit companies continues to remain impossible.

b) Single Shareholder Limited Liability Company (Art 71 New CCLaw):

According to the first paragraph of Art 71, it appears that the law still requires that two parties form a company as the Limited Liability Company is defined as a company where the number of partners is at least two (2). However, the first sentence of the second paragraph seems to allow, as an exception, the establishment of a limited liability company with only one shareholder i.e. “One natural or corporate person may incorporate and hold a Limited Liability Company”.

c) Holding Companies (Art 266 New CCLaw):

The new law now allows the formation of a Holding Company as Limited Liability Companies and Joint Stock Companies. This opens the opportunity to establish subsidiaries inside the UAE or abroad or to control existing companies, by holding shares or stocks enabling such company to control the management of the subsidiary and to have influence on the Resolutions of the subsidiary. The name of the company followed by the expression “Holding Company” shall appear on all the papers, advertisements and other documents issued by the Holding Company.

Conclusion: The introduction of the “Holding Company” as legal form as is common in many other jurisdictions and definitely likely to serve as a favorable argument for large corporations looking at Dubai as alternative location to set upt a legal presence in the Middle East and seeking the optimal corporate structure for all aspects including tax considerations.

The ambiguous wording of Art 71 New CCLaw concerning the Single Shareholder LLC in our view is an option, which is open to UAE Nationals only.

2. Foreign Ownership Restriction (Art 10 New CCLaw)

The New CCLaw has maintained that the maximum foreign ownership shall be 49% only and that the mandatory requirement of national ownership by one or more UAE partners is not less than 51% of any company established in the UAE.

The new version of the CCLaw, explicitly stipulates that any transfer of shares that would affect the mandatory UAE national ownership of 51% will be invalid.

Previously the Old CCLaw did not allow any assignment where the UAE shareholding would drop below 51 %, but did also not include any provision that any transfer of shares breaching the 51% shareholding would be invalid. Consequently, the rule that only the transfer of the shares will be invalid while the companies continue to exist means, in effect, that share transfer documents, which are drafted to preserve the foreign ownership in excess of the 49 per cent, have no legal value.

Conclusion: As a result the shares, being subject to such agreement, would de lege be owned by the national shareholder. This in spite of any agreements to the contrary where before the ownership of the foreign investor was recognized to the value of his shares even if the company was declared void because of the violation of the mandatory national ownership requirement.

3. rectors’ and Managers’ Obligations and Responsibilities (Art 22/24 New CCLaw)

The Old CCLaw only stipulated and imposed quite limited duties and obligations on the directors or managers of LLCs. The New CCLaw now explicitly introduces that:

  1. “a person authorized to manage the company shall preserve its rights and work for the benefit of the company honestly and faithfully. Such person shall do all such acts in agreement with the objective of the company and the powers granted to such person under an authorization issued by the company in this respect” (Art 22 New CCLaw); and
  2. “any provision in the Memorandum of Association or Articles of Association of the company authorizing it or any of its subsidiaries to agree to exempt any person from any personal liability that such person bears in his capacity as a current or former officer of the company shall be void” (Art 24 New CCLaw).

Conclusion: Any provisions in the Memorandum and Articles of Association exempting directors and or managers from liability must be removed in order to comply with the New CCLaw. Further, companies can no longer claim that certain persons, acting on such company’s behalf, were, in fact, not authorized, provided that such lack of authorization was unknown to the relevant third party. Art 25 New CCLaw now clarifies:

“The company may not claim non liability to the person dealing with it, on the ground that the authorized manager was not duly appointed in accordance with the provisions of this Law or the Articles of Association of the company, so long as the acts of such manager is within the usual limits in respect of persons in the same position in companies that conduct the same type of activity as the company.”

4. Companies Registrar (Art 33-38 New CCLaw)

The NewCCLaw introduces the concept of a Companies’ Registrar with the aim to improve the registration of legally required information of a company and provide better access to corporate records. However, the Registrar’s role under the new UAE’s Companies Law is very limited in scope and has no resemblance to the role that a companies’ registrar plays in other, mainly Common Law, jurisdictions. As long as the law restricts the right to inspect and view companies’ records to related parties only and does not grant this access to the public, the role of the Companies Registrar will be limited to supervising the Trade names and Companies Names’ Registry and keeping certain documents.

Conclusion: Although the specific activities and functions of the Companies Registrar are not yet clear and are still subject to a regulation to be issued by the Ministry of Economy, corresponding provisions will have to be included in the Memorandum and Articles of Association.

5. Accounting Records (Art. 26 New CCLaw)

Under the Old CCLaw companies had only limited accounting requirements to observe. The new law has the aim to lift the legal standing of the companies to international standards where the financial status of a company should be accurately and transparently available at all times, enabling the partners or shareholders to confirm that the accounts of the company are properly kept in accordance with the provisions of the New CCLaw. Hence the New CCLaw provides that every company shall keep its accounting books in its head office for a period of at least 5 (five) years from the end of the financial year of the company, Art. 26.

The company shall prepare annual financial accounts including the balance sheet and the profit and loss account and shall apply the International Accounting Standards and Practices upon preparing its periodical and annual accounts, to give a clear and accurate view of the profits and losses of the company.

The New CCLaw does however allow keeping an electronic copy of the originals of any of the documents saved and kept in it in accordance with the regulations established by a decision of the Minister.

Conclusion: It is to be expected that the bookkeeping and accounts will be checked more frequently, possibly every year at the time of license renewal. Companies are therefore advised to adhere to the accounting requirements and implement necessary changes to comply accordingly.

Part 2 of this Article pertaining to the changes for Limited Liabilty Companies will be published in a following issue of lex arabiae.

April, 2015 Elena Schildgen / Dr. Michael Kraemer
Meyer-Reumann & Partners, Dubai Office
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