Comply or Dissolve

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The new Commercial Companies Law (“CCL”) No. 2 of 2015, entered into force on the 1st of July 2015.

The CCL introduced several new legal concepts which should encourage and enhance investments in the UAE. In this article we only focus on a few novelties in relation to the limited liability and joint stock companies.

General Overview

The CCL states that private joint stock companies having more than 75 shareholders should have their corporate governance rules issued by the Ministry of Economy and the board should issue the same for public joint stock companies.

Although there are no specific corporate governance provisions mentioned under the limited liability companies section of the CCL, several articles of the CCL regulate the relation between the shareholders, the managers and business conduct of a limited liability company.

The CCL introduced the concept of the single shareholding company. This limits the liability of a single shareholder to the capital contributed. It provides good grounds to limit personal liability by converting The “sole establishment”, (where the owner would be personally liable for its acts or omissions), into a single shareholding company.

The CCL introduced holding companies. This may take the form of a limited liability or a joint stock company. It’s main purpose would be to hold shares in other entities, the enhancement of management and re- structuring of groups of companies.

The CCL did not offer a major breakthrough in relation to foreign ownership and accordingly it still requires a minimum 51% of UAE shareholding in the capital of a company. However the memorandum of association of a company may provide a different ratio for distribution of profits. In Dubai, a foreign shareholder in a limited liability company, may be entitled up to 80% of the profit distribution. Whereas in Abu Dhabi up to 90% of the profit distribution.

The CCL provides for penalties imposed on managers, directors, chairmen if the provisions of the CCL are breached. These penalties may consist of fines and/or imprisonment and/or the dissolution of the breaching company.

Limited Liability Companies

LLCs can now have more than five managers. External advisers and independent experts may sit on their board of managers.

Shareholders approval is required if a manager is to work, advice, or sit on the board of more than one company having similar or competing activities.

The CCL currently regulates the pledging of shares in limited liability companies in favour of a third party or another shareholder. This is a favourable development particularly if one shareholder is advancing the capital on behalf of another. The pledge can be registered with the commercial registrar. This will also diversify funding resources and securities offered.

The quorum for general assemblies is now set at 75% of the company’s share capital. If the quorum is not constituted in the first meeting, the quorum for the second meeting would be achieved if 50% of the company’s share capital is present. If the quorum is still not satisfied the third meeting shall be valid irrespective of number of the share capital present or represented.

Invitation to general assemblies may now be conducted through modern ways of communication.

The notice period for convening such a meeting is shortened to 15 days and can be further reduced if same is agreed by the shareholders.

Shareholders details such as date of birth and domicile for individuals and date and place of registration for corporate shareholders should be reflected on the MOA.

Joint Stock Companies

The CCL provides that board members are voted through cumulative voting. This would support the minority shareholders to group their votes for electing a board representative.

A Board member should declare any competing interest, or other interests and must refrain from voting on such a matter.

Loans may not be granted to any board member, his spouse or any relative up to the second degree.

The CCL permits Joint Stock Companies to invite a strategic investor to become a shareholder in the company without the existing shareholders exercising their pre-emption rights. The strategic investor may add value by increasing the working capital, bringing in new technology, know how or such other strategic elements which would benefit the current business of the company.

The CCL has introduced the concept of authorised and issued share capital for joint stock companies. The board of directors can increase the issued share capital within the limit of the authorised capital.

The CCL permits the creation of classes of shares accordingly. It is possible to issue preferred shares such as shares endowed with dividends or voting privileges.

Conclusion

All companies irrespective of their type should amend their memorandums of association by the 1st of July 2016 to comply with the CCL. Failure to comply will not just result in penalties but may lead to the dissolution of a company.

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