CLIENT ALERT: Changes to the Companies Law in the UAE: In an attempt to harmonize its legal framework with international norms, the UAE government issued Federal Law no. 2 of 2015 concerning Commercial Companies. Find out what this means for your business.
CLIENT ALERT: UAE Introduces New Commercial Companies Law
In an attempt to harmonize its legal framework with international norms, the UAE government issued Federal Law no. 2 of 2015 concerning Commercial Companies. This law was announced on April 1, 2015, and became effective on July 1, 2015. The law provides for a one-year grace period, which means that existing companies have until July 1, 2016 to comply with the new law or be deemed dissolved.
The law does not apply to:
- Companies that are excluded by UAE Federal Cabinet resolution;
- Companies that are wholly owned by federal or local governments and,
- Companies that are operating in certain fields, such as gas and power, in which the federal or local government directly or indirectly holds 25% and there is explicit provision in the company’s memorandum stating this status.
The rule mandating a minimum of 51% share ownership by a UAE national over both Limited Liability Companies (LLCs) and Joint Stock Companies (JSCs) is still in effect. In order to establish a branch, foreign companies still need to use a local agent (either a UAE national or company wholly owned by UAE nationals).
The new law allows for a ‘Sole Shareholder’ for LLCs and JSCs. In addition, the new law recognizes the establishment of LLCs and JSCs as holding companies who are able to conduct activities solely through subsidiaries. The new law recognizes investment funds and states that they shall have legal personality, which was not permissible under previous laws.
For LLCs, partners in an LLC can now pledge their shares. For there to be a general assembly meeting, there needs to be a quorum of 75% of share capital. The old limit of 50 shareholders has been increased to 75, but there is still a requirement that all shareholders must attend meetings in person. This is unlike in many jurisdictions where a shareholder can attend a meeting via telephone or videoconference. Additionally, the old law’s cap on the number of directors at five has been eliminated.
The requisite notice for meetings has been shortened from 21 days to 15 days, and companies now have the option to send notice via a method of their choice in the Memorandum of Association. Shareholders can now delegate attendance at a shareholder meeting to third parties if they are unable to attend.
The new law requires companies to present a draft of a merger contract to the General Assembly of Merging Companies. A party holding 20% of shares can object to the merger and subsequently appeal before UAE courts. Partners and shareholders who object to a merger resolution can now withdraw and recover the value of their shares. However, a holding company may merge with one or more of its wholly-owned subsidiaries without a merger contract.
Many foreign investors were anticipating a change in the law that would allow fully foreign-owned companies. While the new law has not delivered this degree of change, it did note that a new Foreign Direct Investment Law may be enacted in the future that will allow 100% foreign-owned LLCs in certain sectors. No additional information was provided regarding which sectors will be covered, or when the law will come into effect.