New UAE Commercial Companies Law:

Summary

Federal Law No. 2 of 2015 concerning Commercial Companies (“New CCL”) has come into force on 1 July 2015, replacing the existing Federal Law No. 8 of 1984 concerning Commercial Companies (“Old CCL”). Companies are required to update their Memorandum and Articles of Association by 30 June 2017 with changes of New CCL, and any companies failing to do so, the Company will deemed to be dissolved. The most useful changes adopted in the New CCL are:

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• Allowing sole shareholder limited liability companies (LLCs) and private joint stock companies.

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• Exempting government owned companies from New CCL if the company includes a provision in their memorandum to that effect

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• Allowing partners in LLCs to pledge their interests in LLCs

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• Allowing founders to list their businesses yet retain 70% of the shares (as applicable for Joint stock companies)

Some other notable features of the New CCL include the recognition of the concept of holding companies, procedures for pledging shares, expert valuation of shares in kind (i.e. non-cash) and the requirement to rotate auditors (for Public Joint Stock Companies) every three years. By introducing specific and strategic amendments, the New CCL contains a number of helpful improvements and modifications on the Old CCL. This article provides an overview of the key changes which will affect all types of companies operating in the UAE.

Key Highlights

The table below summarizes and makes comparison of the key changes made in New CCL (as compared to the Old CCL):

New CCL	Old CCL	PB views
Key Changes for all UAE companies
UAE national participation
New provision explicitly invalidating any transfer of shares which may affect the minimum UAE national shareholding of 51% (article 10 of New CCL).	No provision explicitly invalidating any transfer of shares that will be in breach of the minimum UAE national shareholding of 51%. However, the Old CCL did prohibit any assignment of UAE national shareholding below the 51% threshold.	Despite much speculation, the New CCL retains the same approach as the Old CCL in relation to the foreign ownership restriction, i.e. 51% (UAE national) / 49% (foreign), or 100% GCC nationals. However, the UAE government is considering relaxing the requirement of such restriction in certain industry sectors under a new Foreign Direct Investment Law regime (timing of which is unclear at this stage)
Corporate structuring
1.LLCs and JSCs are now permitted to be established as holding companies in order to conduct business activities solely through their relevant subsidiaries (article 266 of the New CCL). 2.One natural person or one company may be the sole shareholder of a LLC (art. 71). One company may be the sole shareholder of a PrJSC (art. 255) 3.Investment funds shall have their own legal personality, legal form and financial position (art 272) 4.Requirement deleted 5.Provisions regulating joint venture companies deleted	1.The concept of a “holding company” was not recognized 2. Sole shareholder companies not allowed 3.Investment funds not recognized 4.State-owned companies: companies in which a state or public body has a shareholding must be JSCs 5.Joint venture companies: contains provisions dealing with joint venture companies	In many other jurisdictions, setting-up holding companies is now a common practice for large corporate groups to achieve tax and/or other corporate benefits in their corporate structure. By recognising the concept of a “holding company” under the New CCL, the UAE will become more appealing, as a jurisdiction, to large corporate groups when they are considering restructuring or establishing a presence in the UAE.
Free zone companies
Free zone companies to be governed by the New CCL, if the laws of the free zone permit companies to operate outside of the free zones. The UAE Federal Cabinet shall issue a resolution determining the conditions to register free zone companies to operate outside of the free zone (article 5)	Not applicable to free zone companies	Allowing certain free zone companies to operate onshore will provide greater business flexibility / mobility and, therefore, it is logical for such free zone companies to be subjected to the New CCL.

New CCL	Old CCL	PB views
Companies Registrar
The Minister of Economy shall issue a regulation for the activities of a company’s registrar. In addition to activities assigned by the Minister of Economy, the company’s registrar shall supervise the trade names registrar. The companies registrar will be required to hold company documents for a period of time which the Minister of Economy determines and concerned parties will have a right to inspect records kept by the registrar (arts. 33-37)	No Companies Registrar.	We await to see whether the establishment of the Companies Registrar will lend more coordination to the formation and dissolution of companies in the UAE. In theory, the Companies Registrar should provide better access to corporate records by registering the information that companies are legally required to supply.
Accounting requirements
Requires applying international standards to give a clear and accurate view of the profit and losses of a company (article 27) All companies required to keep accounting records for five years (article 26) New offence for failure to keep accounting records for the company to explain transactions — triggering fine up to AED100,000 (article 349)	Limited accounting obligations on companies	The aim is to bring accountability and transparency of a company up to international standards. Consequently, a company should be able to accurately reveal, at any time, the financial position of the company, and enable shareholders to verify that the company’s accounts are properly kept in accordance with the New CCL.
Director’s / manager’s duties
A director / manager is a person authorised to manage the company and must preserve the rights and works of the company with care of a precise person (article 22 of the New CCL). In addition, any provision in the company’s memorandum and articles of association exempting any director / manager from personal liability (that he / she bears in his / her capacity as an officer) is voidable (article 24 of the New CCL).	Limited duties and obligations imposed on directors / managers	The New CCL introduces this explicit article: (a) stipulating that directors / managers must act for the benefits of the company; and (b) voiding any provision in the company’s memorandum and articles of association exempting a director / manager from personal liability. The intention is to bring directors’ / managers’ duties closer to international standards.

New CCL	Old CCL	PB views
Excluded companies
Excludes: • Companies excluded by resolution of the UAE Federal Cabinet • Companies wholly owned by federal or local governments and companies held in full by such companies, if a special provision to this effect is contained in the company’s memorandum • Companies operating in certain oil, gas and power sectors in which the federal or local government directly or indirectly holds 25%, if the company’s memorandum contains a special provision to this effect (art. 4)	Only excluded companies by resolution of the Federal Cabinet and companies operating in certain oil, gas or power sectors.	Aside from excluded companies as set out above, it is important that all companies amend their memorandum (“MOA”) and articles of association by no later than 30 June 2017 to comply with the New CCL. Any company that fails to do so shall be deemed to be dissolved (article 374 of New CCL). Further Article 357 puts a penalty of AED 2,000 per day for any delay in amending the MOA from due date as above.
Key changes for Limited Liability Companies
Sole shareholder
One natural person, or corporate entity, may be the sole shareholder of a LLC (article 71 of the New CCL), and one corporate entity may be a sole shareholder of a Private JSC (article 255 of the New CCL).	A company with sole shareholder is not permitted.	Under the Old CCL, LLCs may only be established by a minimum of two shareholders. Allowing a sole shareholder to incorporate an LLC means that sole shareholders may enjoy the benefit of limited liability in their businesses by exercising their sole discretion.
Share pledges
Allows partners in LLCs to pledge their interests. Pledges must be made in accordance with the company’s memorandum under an official notarised document and entered into a central commercial register (article 79)/td>	No provision permitting shareholders in LLCs to pledge their shares.	The Old CCL was silent in respect of pledging of shares, and so it was questionable whether shares can be pledged legally under the old regime. By introducing a new provision for perfecting security by way of share pledge over shares in an LLC, it should improve access to debt financing as shareholders will now be able to grant security over their LLC shares.
Maximum number of directors / managers
The management of an LLC can be undertaken by one or more directors / managers as determined by the company’s memorandum and articles of association or the general assembly of the company (article 83 of New CCL).	A maximum of 5 directors / managers.	Removing the cap on the number of directors / managers appointed to an LLC will allow for greater business flexibility and networking, and enable talented external advisers to sit on the board of directors / managers (particularly helpful to regional family businesses with a large group of companies).
New CCL	Old CCL	PB views
Managers not competing with the company
Managers not permitted to manage any business in competition with the company without the consent of the general assembly (article 86)	No provision explicitly restricting directors / managers from managing competing businesses.	This new non-compete provision is consistent with the new director’s / manager’s duties provision (i.e. directors / managers have to act for the benefits of the company). Directors / managers should be mindful not to breach this new non-compete provision as, otherwise, such director / manager may be dismissed and required to compensate the company.
Valuation of shares for non-cash consideration
Requires either: (i) agreement of partners and approval of DED or (ii) valuation by a financial adviser approved by the DED (article 78)	Shareholders can agree to a valuation of shares in kind, and such valuation is prescribed in the company’s memorandum and articles of association.	Whilst it has become slightly more onerous for the shareholders to agree to a valuation of their shares in kind (i.e. non-cash consideration) as such valuation has to be approved by the DED, the New CCL does allow professional financial advisers (pre- approved by the DED) to assist with such valuation (which could potential expedite the valuation process especially in situation where there is a disagreement between the shareholders).
3. Key changes for Joint Stock Companies (Public JSCs and / or Private JSCs)
There are many changes for joint stock companies (please send us an email, if you would like us to share these) such as in Share Capital, protection of minority shareholders, auditors rotation (every 3 years), takeover regime, corporate governance

Conclusion

There are, of course, various other changes that have been introduced in the New CCL that have not been discussed in this article. However, this article aims to provide an overview of the key provisions rather than an exhaustive list of all of the changes. While companies incorporating in the UAE will appreciate the evolution of the Commercial Companies Law, some areas remain ambiguous. We expect the government will issue clarification or guidance in due course.

But both new and existing companies should ensure their memorandum reflects the updated law

Article prepared by: Rishi Chawla, Partner, Premier Brains

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