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

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). While the changes in the law are unlikely to have a substantial impact on the day-to-day operations of most companies in the UAE, the by-laws of virtually all companies with limited liability (LLC) will have to be updated in order to avoid such companies being “deemed dissolved” as imposed by Art. 374 New CCLaw).

A. Introduction:

Part 1 of this article in the previous issue of “lex arabiae” provided an overview of the most important changes, which were introduced by the New CCLaw. The second part of this article now aims to provide guidance on some of the changes that need to be introduced to virtually every LLC’s by-laws in order for such by-laws to comply with the provisions of the New CCLaw.

To be clear, we do not expect these mandatory changes to a LLC’s Memorandum and Articles of Association (MOA) to have any significant impact on the day-to-day commercial operations of such LLCs. In most cases, the MOA is factually overruled by either a side agreement between a foreign investor and a local “sponsor” (the typical 51/49% UAE LLC). Or the MOA is overruled by a shareholders’ agreement, which describes the rights and obligations of the shareholders in a LLC in more detail than would be appropriate to be contained in a MOA. However, given the penalty Art. 374 New CCLaw imposes on all companies, which do not comply with the New CCLaw (“[…] if a company fails to comply […], the company shall be deemed as dissolved in accordance with the provisions of this law.”), action will need to be taken.

B. Required Changes (Selection):

  I. Managers’ Duties and Liability

One of the more important new requirements that are set out in the New CCLaw relates to the duties and liabilities of the general managers of an LLC. The Old CCLaw was comparatively quiet on this topic.

According to Art. 22 New CCLaw all managers of a company now have a duty to “preserve [the company’s] rights and work for the benefit of the company honestly and faithfully”. Art 24/84/162 New CCLaw underlines this obligation according to which managers are liable for their actions and any exemption from their liability is declared null and void.

Many existing MOAs do include such exemptions or indemnifications to the managers’ benefit, and such provisions are now non-compliant with the requirements of the New CCLaw and must be removed.

At the same time, the New CCLaw strengthens the management authority of all managers. Art. 83 New CCLaw establishes an assumption that all managers “are authorized to exercise full powers to manage the company […]” unless the MOA states otherwise. Although the Old CCLaw contained a similar provision, practice in the UAE has so far been that MOAs were supposed to set out each individual power granted to the manager. It has, however, always been a bit of a problem setting out all acts a particular manager was authorized to undertake (thus leading to rather lengthy and often misleading management powers of attorney and corresponding provisions in the MOA), rather than simply stating the limitations of the manager’s authorities. Hence, the New CCLaw gives reason to believe that defining the general managers’ authorizations will now be significantly  simplified. MOAs should use this newfound liberty and simply refer to Art. 83 New CCLaw while specifying the general manager’s powers.

For the first time the New CCLaw (Art. 86) now also introduces an obligation on managers not to compete with the company they manage, be it by such manager also managing another, competing enterprise or otherwise. Such non-compete obligation can be lifted, however, subject to a resolution by the general assembly to that effect.

The New CCLaw further introduces an increased focus on the company’s books and records being maintained in a proper fashion. Art. 15 New CCLaw establishes an obligation to maintain the MOA up-to—date at all times. Where registration is required i.e. for example, share transfers, any amendment in the activity of a company, restrictions on the manager’s powers, etc. this must be done with the “competent authority” (i.e. the relevant Department of Economic Development or later the newly introduced “Registrar” – see below) within not more than fifteen working days. Failure to do so will result in the risk for  the company’s manager(s)  to be personal liabile  for any damage resulting therefrom.

Furthermore, proper registration of all relevant details in the MOA has become a prerequisite for such details being effective vis-á-vis third parties. Matters, registration of which is required, are not enforceable against third parties until and unless properly registered in the MOA (Art. 15 New CCLaw).

  II. Accounts and Auditors

In an effort to bring the accounting practices in the UAE more in-line with international accounting practices, some provisions related to accounting were amended as well. The requirement to maintain accounting books did exist under the Old CCLaw as well, but the New CCLaw now establishes requirements that are more specific.

According to Art. 26 New CCLaw, all companies are now required to maintain accurate accounting records at all times. Records shall be kept for at least five years following the end of the financial year of the company.

All accounting records need to be maintained in accordance with “International Accounting Standards and Practices” and must be audited at least once every year (Art. 27 New CCLaw). A new requirement is the requirement for all existing LLCs to appoint new auditors at least every three years (Art. 102/243 New CCLaw). This should be reflected in each company’s MOA as well.

  III. Registrar

For the first time, the New CCLaw introduces the office of a “Registrar” (Art. 33 – 38 New CCLaw). While the final role of such Registrar remains to be defined by the Minister of Economy, the New CCLaw suggests that the Registrar will have mainly two tasks: the supervision of the allocation of trade names and record keeping of all relevant corporate documents.

Duplications of trade names have long been a problem in the UAE. Not only has there been no proper communication amongst the Departments of Economic Development in the individual Emirates, thus allowing completely unrelated “XYZ LLCs” to exist in each of the Emirates. There has also always been a conflict between trade names and registered trademarks, leading to a range of UAE based companies being named after well renowned global corporations, presumably in many cases with rather dubious intentions.

In light of the above, the introduction of the office of the Registrar is a welcome step indeed.

The Registrar will also be charged with maintaining a register of all relevant corporate documentation. Up until now, commercial entities have only been required to provide the relevant Department of Economic Development with very basic documentation (usually not more than a current lease agreement) upon license renewal once a year. As mentioned above (see part B. I.), the company managers are now obliged to maintain up-to-date corporate records and provide copies thereof to the Registrar.

  VI. Annual General Meetings

Each company is required to have an annual general meeting of all shareholders within four months following the end of the company’s financial year (Art. 92 New CCLaw). Nothing has changed insofar. However, the minimum quorum has changed, as has the process to call for an annual general meeting.

The Old CCLaw (Art. 244) required invitations to be sent to all shareholders at least 21 days prior to the planned annual general meeting. Invitations had to be sent by registered mail. No other option was permissible.

The New CCLaw (Art. 93) shortens the notice period to at least 15 days and now allows notifications to be sent by any means, provided that such means (invitations by email, for example) are expressly allowed in the company’s MOA. The shareholders are free to agree on even shorter notice periods.

Another change that will need to be made to most MOAs relates to the quorum requirement for annual general meetings. Art. 249 Old CCLaw required only shareholders representing at least 50% of the company’s capital to be present at the annual general meeting in order to constitute a quorum. Most current MOAs refer to such minimum quorum requirement. This is no longer permissible under the New CCLaw, however (Art. 96), which requires shareholders representing not less than 75% of the company’s capital to be present at the annual general meeting.

This new quorum requirement is likely to be particularly cumbersome in practice. Under the Old CCLaw there was no particular quorum requirement for a second meeting, if a quorum is not present at the first annual general meeting. Art. 96 New CCLaw now requires a quorum of 50% (and hence, still more than the maximum of 49% a non-UAE national shareholder is allowed to hold) even at the second meeting. This means that the foreign shareholder(s) alone will constitute a quorum only at the third meeting, assuming that no quorum was present at the first two meeting attempts. In practice, this means that the only way for the foreign shareholder(s) to make decisions at annual general meetings without involvement of the local shareholder is at the third meeting attempt. A lot of time will have passed at such time, thus making the whole process unnecessarily (or deliberately?) cumbersome.

  V. Pledging of Shares

Art. 79 New CCLaw introduces the opportunity for shareholders to pledge their shares “to another partner or to a third party”. Any such pledge becomes effective only after such pledge has been registered in the commercial register. This is new and could have a significant practical application since, in principle, the local shareholder can now pledge his/her shares to the foreign partner and have such pledge officially registered.

  VI. Other requirements

The New CCLaw describes a range of further requirements that UAE companies need to comply with going forward. Most importantly, Art. 104 New CCLaw states that the provisions in the New CCLaw relating to Joint Stock Companies are applicable to LLCs as well.

Due to their nature, Joint Stock Companies are usually more heavily regulated than “simple” LLCs. It is, therefore, rather surprising to see a provision like Art. 104 in the New CCLaw.

Art. 151 New CCLaw, for example, requires the chairperson and the majority of the board of directors of a company to be UAE nationals. Most LLCs are unlikely to have more than one manager, the nationality of whom can hardly be split by a 51/49 ratio.

Further, Art. 140 New CCLaw requires JSCs to publish their MOA on their company website. Through Art. 104 New CCLaw, this applies to LLCs as well. While it is common in other jurisdictions for LLCs to publish the most vital company information on their website, this is a new requirement for companies in the UAE and somewhat contradicts the UAE authorities’ classification of even the most basic corporate information as being of a “confidential” nature. That being said, it remains to be seen if this requirement will actually be enforced in practice.

The examples above do not require any amendment of the companies’ MOAs however, which is why this article will not deal with these requirements, and their potential implications in the future, in more detail.

C. Conclusion

The New CCLaw establishes various new requirements, which all UAE companies, including LLCs will need to follow. Given that most of these new requirements are unlikely to have a significant effect on a company’s operations it remains unclear why the New CCLaw aims to penalize any non-compliance as drastically as it does in Art. 374 thereof. However, it remains a fact that all UAE incorporated companies do have to comply in order to avoid being “deemed dissolved”, so all companies are well advised to have their by-laws checked and adapted in order to ensure undisturbed continued operations.

October, 2015 Dr. Michael Krämer
Meyer-Reumann & Partners, Dubai Office
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