The new UAE Commercial companies law: A comparative view
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Whilst the New Law introduces some new concepts and approaches, most of the essential features of the Existing Law are maintained. By the same token, the majority of board seats, including the chairman of the board, of public joint stock companies must be held by UAE nationals. Founders of public joint stock companies continue to be restricted by a lockup period of two years under the New Law, which defeats sell-down exist options non voting stock options dubai IPOs.
However, the restriction on the number of managers under the Existing Law namely five managers has been lifted under the New Law. This note aims to shed some light on the main differences between the New Law and the Existing Law, the fresh concepts enacted under the New Law, and to highlight the practical impact of these differences.
To download a Wrap up table of the article click here. The new UAE Commercial companies law: July — August Whilst the New Law introduces some new concepts and approaches, most of the essential features of the Existing Law are maintained.
On the other hand, the New Law introduces some new concepts. For example, non voting stock options dubai New Non voting stock options dubai Some other reforms are discussed below in details. This note follows the same sequence of the New Law. Detailed Views General Rules: However, it is to be noted that article 5 states that there will be a Cabinet decree that will set out the conditions which should be followed in registering free zones companies in case these companies wish to operate onshore or outside the non voting stock options dubai of the free zone in question.
Article 6 — Corporate Governance — The New Law provides that private joint stock companies will be subject to corporate governance rules provided that such companies are composed of more than 75 shareholders. A ministerial decree setting out the applicable corporate governance rules will be issued in due course.
The expected corporate governance rules will include financial penalties on board members, managers and auditors of any defaulting company. This applies on private joint stock companies and limited liability companies. Article 24 — Exclusion of Liability — The New Law introduces an explicit clause stipulating that any non voting stock options dubai in the articles of the company allowing the company or any of its subsidiaries to agree to exclude any person from their current or previous liability towards the company will be void.
However, this article does not address the provisions that may be agreed upon between the shareholders in separate shareholders agreement in particular between nominees and beneficial owners whereby one of the shareholders is excluded from liability.
Unexpectedly, this clause prohibits the exclusion of liability in general without limiting the exclusion to liability arising out of gross negligence or willful misconduct, as provided under the Civil Code. Article 26 — Companies Accounting Books — New obligations are imposed on companies to retain their accounting books for a period of not less than five years from the end of each financial year.
This is a new requirement under the New Law that is not provided for under the Existing Law. This provision comes in line with similar requirements in other Middle Eastern jurisdictions. Also, companies may retain electronic versions of their documents provided that these documents will be saved in compliance with a decree to be issued by the Minister. Article 28 — Financial Year — Each financial year may not exceed 18 months and should not be less than six months.
Likewise, it will affect the timeline required to convert a limited liability company to a public joint stock company as provided for under article of the New Law. Article 32 — offering of shares to public — This article explicitly prohibits any company either in one of the free zones or onshore from making any advertisements or marketing to invite general public to subscribe in shares without obtaining the prior non voting stock options dubai of SCA.
Under the Existing Law, there is no explicit provision prohibiting such practices, but rather it is a matter of practice and unwritten rules followed by SCA. Article 36 non voting stock options dubai Retention of Documents — Similar to article 26 referred to above, article 36 provides that the Minister will issue a decree setting out the time limit for companies to retain corporate documents.
Rules Governing Limited Liability Companies Article 71 — Sole ownership —Article 8 provides that a limited liability company may be established by one natural or corporate person. This approach follows free zone regulations which allow the incorporation of a free zone establishment FZEwhich originally is non voting stock options dubai common law concept.
Under the Existing Law, limited liability companies may only be established by a minimum of two founders and a maximum of fifty.
The maximum limit of fifty partners still applies under the New Law. Article 79 — Pledge of Quotas 1 shares — The New Law provides that limited liability quotas or shareholdings may non voting stock options dubai pledged.
The Existing Law is silent in respect of pledge of quotas, and so it is questionable whether quotas can be pledged legally. This new development will assist raising of debt finance by owners of limited liability companies and will enhance the security package that can be offered to the financiers.
Pledge of quotas will add another level of comfort to beneficial owners of quotas foreign investors in respect of their shareholding relationship local registered owners nominee. Article 80 — Preemption Rights — preemption rights are still mandatory by operation to law under the New Law, as is the case under the Existing Law.
Under the Existing Law, the maximum number of mangers is five. Article 86 — Competition — Under the New Law, manager s of a company may not be allowed to operate any business in competition with the business of the company in question.
Defaulting manager s will be discharged and compensate the company accordingly. This matter is not addressed under the Existing Law. Article 93 — Invitations to General Assemblies— Invitations to general assemblies need to be sent out 15 days before the date of the meeting or less than 15 days if all partners agree. Under the Existing Law, the notice period required is 21 days which may not be abridged. If the quorum non voting stock options dubai not satisfied in the second meeting, a third meeting shall be called for after the lapse of 30 days from the date of the second meeting, which shall be valid regardless the quorum attended such meeting.
This means that the existing difficulties in achieving quorum general assemblies for public joint stock companies at the first attempt have been magnified by the New Law. If the quorum is not satisfied in the first meeting, a second meeting shall non voting stock options dubai called for within 21 days from the first meeting, which shall be valid regardless of the quorum attended such meeting.
Article — reference to joint stock companies rules — Article of the New Law refers to the rules governing joint stock companies with respect to any matter which is not addressed under the rules of limited liability companies. Such reference is not provided for under the Existing Law. Under the Existing Law, founders committee should be between three to five members.
This will also promote IPOs for companies that have good financial standing and non voting stock options dubai not require additional capital inflows which are high compared to their pre-existing issued capital. Unfortunately, the New Law does not facilitate or permit sell-downs by existing shareholders, an avenue already available in most developed markets. Such a reform would have greatly non voting stock options dubai new IPO transactions.
Under the Existing Law, underwriting activity is not addressed. There will be a ministerial decree regulating the underwriting activities to subscribe for unsubscribed shares and resell them again in the stock market. The facilitators of underwriting could enable the IPO market to flourish and attract leading global financial institutions to act as underwriters and develop non voting stock options dubai UAE capital market.
Article — Subscription period — Subscription period opens for a period of a minimum of 10 days and a maximum of 30 days. Under the Existing Law, the subscription period opens for a period of a minimum of 10 days and a maximum of 90 days. The detailed regulations governing and regulating book building will be issued later.
Pricing is to be determined at the discretion of the issuer and the banks at non voting stock options dubai valuation that is acceptable to investors, the issuer and the selling shareholder s. This article comes as an attempt to facilitate and expedite the process for incorporation.
Article — The Composition of the Board of Directors — Board of directors under the New Law should be composed of a minimum of three members and non voting stock options dubai maximum of Under the Existing Law, board of directors should be composed of a minimum of three members and a maximum of Cumulative non voting stock options dubai is not provided for under the Existing Law, but rather it was under the applicable Corporate Governance rules.
The voting mechanics will allow each shareholder to distribute voting powers amongst various board candidates. This should increase the chances of minority shareholders achieving board representations. Article — Nationality of Board Members — The requirement under the Existing Law that non voting stock options dubai majority of board members and the chairman should be UAE local nationals continues to apply under the New Law.
Article — Board Meetings — Under the New Law, the board non voting stock options dubai directors shall meet at least four times a year. Such requirement is not provided under the Existing Law. This is something that has been dealt with separately under the Corporate Governance rules.
Proceedings for annulment are time barred on the expiry of 60 days from the date of adopting the resolution contested. Under the Existing Law, the applicable prescription period is one year.
Under the Existing Law, the notice period required is 21 days and cannot be abridged. In addition, the company may decide to have an authorized capital which may not exceed twice the value of the issued capital. A new set of rules will be issued to allow companies to increase its issued capital within its authorized capital.
By way of explanation, the authorized capital is not more than a notional concept which has no financial implications or effect. In other jurisdictions, it only allows the board of directors of joint stock companies to increase the issued capital within the limits of the authorized capital by a board resolution instead of having an extraordinary general assembly resolution.
So the difference between authorised capital and issued capital is analogous to the difference between an approved loan facility and a partially drawn approved loan facility. The board members of such company non voting stock options dubai increase the issued capital with any amounts until they reach the ceiling of AED million with a board resolution only instead of holding an extraordinary general assembly.
Any increase of capital in excess of the million authorized capital should be pursuant to a resolution from the extraordinary general assembly of the company. Therefore, the authorized capital is merely to facilitate procedural matters associated with capital increases. In the UAE, there will be a ministerial decree that will set out the procedures by which the issued capital can be increased within the authorized capital.
Under the Existing Law, the board of directors has five years to implement any capital increase resolution of the general assembly. Under the Existing Law, the board of directors has a period of five years to execute the capital increase resolution of the general assembly. Under the New Law, shareholders are allowed to sell their entitlements under non voting stock options dubai rights issue to other existing shareholders or to third parties.
Under the Existing Law, this is not possible. Article — Nominal Value of the Share — The New Law provides non voting stock options dubai the nominal value of the share is to be paid within three years from the date of incorporation. Under the Existing Law, the nominal value of the share is to be paid within five years from the date of incorporation. Article — Financial Assistance — The New Law prohibits companies from providing financial assistance to assist one of its shareholders to subscribe or buy its shares or bonds.
The rationale for the prohibition is that the capital of the company will not be protected if the company assumes financial risk in a transaction relating to its own shares. The definition of Strategic Investor is set out in 1 above. In addition, the Strategic Investor has to have issued at least two financial statements.
This is a new development that is not addressed under the Existing Law. Article — Debt Capitalization — The New Law non voting stock options dubai states that a company may convert its debt to equity. This is not addressed under the Existing Law.
Article — Employees Share Scheme — The New Law explicitly addresses the possibility of issuing employees incentive share scheme. SCA shall issue a decree regulating employees share scheme. The Existing Law does not address this issue.