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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). Art. 374 NewCCLaw puts an obligation on all companies governed by the NewCCLaw to amend their by-laws by no later than 30 June, 2016, failing which stiff penalties will apply. This article will look at the effect the New CCLaw will have on LLC’s daily commercial operations.

A. Introduction
In previous articles, we had looked at the changes that were introduced by the New CCLaw. This article will now look at the New CCLaw’s practical implications on the day-to-day operations of “onshore” LLCs.

B. Increased focus on Managers’ activities
As mentioned in our previous article, the New CCLaw puts additional focus on managers’ activities. The previously common practice of indemnifying managers from potential liabilities has now explicitly been outlawed by Art. 24 New CCLaw, which states:

“[…], any provision in the Memorandum of Association or Articles of Association of the company authorizing it […] 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.”

We believe the practical application of Art. 24 New CCLaw to be limited, however. Even in those by-laws, which included managers’ indemnities, these indemnities were usually limited to instances where liabilities arose without the manager being at fault or where the manager could not reasonably foresee that his actions would result in damage to the company. Such indemnities usually did not cover instances where the manager intentionally caused damage. Now, with Art. 24 New CCLaw in place, things are unlikely to change much. Generally, compensation claims do not only require fault, but also liability for such fault. Hence, even with the New CCLaw in place the determination of a manager’s liability still depends on whether or not the manager can evidently be blamed for the damage.

Art. 15 New CCLaw now also puts an obligation on managers to properly maintain the company’s by-laws and to inform the “Registrar” of any relevant new developments, details of which are required to be entered into the commercial register. Failure to do so may again attract personal liability of the manager.

At present, however, the office of the “Registrar” has yet to be established. Furthermore, in most instances (i.e. where there is a change of management, a change of shareholders or an amendment to the registered capital) the manager will have a vital interest in recording such change anyway (if there is a change of management, for example). Or the manager will be pressured by the shareholders to record the change (in instances where shareholders change, for example). That being said, the practical implications of this new requirement would appear to be rather limited.

C. Accounts and Auditors
Art. 27 New CCLaw requires all LLCs to have its accounts audited at least once every year. This is not a new requirement as such. Even the Old CCLaw required LLCs to have their accounts audited annually and to submit them to the Ministry of Economy and the DED. This was never followed in practice, however, and any attempt to actually submit audited accounts to either the Ministry of Economy or the relevant DED would most probably have resulted in a surprised face on the other side of the counter. The New CCLaw (Art. 102 / 236) retains this requirement and it now remains to be seen if the DEDs’ practice will change going forward.

Maintaining accurate and audited accounts would appear to be good business practice anyway, however, and even free zone authorities across the board do require audited accounts to be submitted to them on an annual basis. Hence, while this “new” requirement might, in fact, require some LLCs to change their accounting practices we do believe that for the majority of companies the New CCLaw describes not much more than a common practice.

D. Annual General Meetings
The New CCLaw also introduces more elaborate regulations for quorum requirements in  Annual General Meetings (“AGM”). Under the Old CCLaw, if a quorum (then, 50% of the capital being represented) was not present during the first meeting, there was no quorum requirement for the second meeting.

The New CCLaw (Art. 96) makes matters a little more complicated. The first meeting is quorate only if at least 75% of the capital are present. Even the second meeting is quorate only if at least 50% of the capital are present. This means that neither the first, nor the second meeting can take place without the UAE national shareholder (holding not less than 51% of the capital) being present. Only the third meeting will be quorate even without attendance of the UAE national shareholder(s).

In our view the new Art. 96 New CCLaw makes matters more complicated, but for no apparent reason. We can only speculate about the reasons behind this new requirement. However, common practice in most LLCs would appear to be that all shareholders, including the UAE national shareholder, meet more or less informally once every year and confirm their attendance by signing the AGM’s minutes of meeting, thus avoiding the complications Art. 96 stipulates in certain instances. Going forward, there certainly may be instances where UAE national shareholders may use the more burdensome quorum requirements to their advantage, for example in order to remind their fellow shareholders of their existence and the fact that they have a role to play and must not be ignored. As with most disputes between foreign investors and their UAE national “sponsors”, however, our experience shows that such disputes are rather rare.

E. 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.

To our knowledge this process has yet to be tested, however, and even if it is assumed that it is, in fact, possible for the local shareholder to pledge his/her shares to the foreign partner, this relates to the shareholder level only and will not have any impact on the daily commercial operations of the company.

F. Conclusion
The New CCLaw is unlikely to have any major, or often any, impact on the day-to-day commercial operations of UAE LLCs. In light of this, the rather draconian sanctions of Art. 374 New CCLaw (companies being “deemed dissolved” if their by-laws do not comply with the New CCLaw by no later than 30 June, 2016) would appear rather surprising. However, the New CCLaw has a more far-reaching impact on Public Joint Stock Companies (“PJSC”), which are not the subject of this article. It thus may be assumed that Art. 374 New CCLaw aims more at non-complying PJSC instead of the more standard LLC (which does not alter the fact that it does apply to LLCs in equal measure, however).

April, 2016 Dr. Michael Krämer
Meyer-Reumann & Partners, Dubai Office
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