15 Oct 2015

Financial assistance is prohibited unconditionally in the new CCL, but does it apply to both LLCs and Joint Stock Companies

Authored by: Alan Rodgers

Financial assistance is prohibited unconditionally in the new CCL, but does it apply to both LLCs and Joint Stock Companies

Financial assistance is generally a term meaning, a company offering financial assistance (including guarantees or other security) for the purchase of its own shares, or the shares of either its holding companies or subsidiaries. It was previously prohibited under English law to prevent a cash rich company, that is a target of an acquisition by an individual, providing the finance for it to be acquired.

Financial assistance has historically been prohibited or restricted to an extent by law in many jurisdictions in order to protect the shareholders of the relevant company, in particular in the case of public companies.

Under the English Companies Act 2006, certain financial assistance prohibitions, in relation to private companies, have been repealed but prohibit the practice for public companies. However there are exceptions to the rule, for instance if the financial assistance can be shown to be for purposes other than acquisition, or is incidental to the acquisition and is in the best interests of the target company.

It is notable therefore that, in the UAE, whereas under the old CCL there was no prohibition on financial assistance, it has been introduced as a new prohibition under the new CCL Article 222 which prohibits financial assistance possibly in limited liability companies as well as in joint stock companies.

Although further clarity in terms of interpretation is awaited, if Articles 104 and 222 of the new CCL are to be read together, a more restrictive approach to financial assistance would appear to have been adopted in the UAE than in say the UK.

Articles 104 and 222 are two new provisions in the new CCL 2/2015 promulgated in July 2015, which are causing some concern in acquisition finance.

Article 104 states in our English version,

“Unless otherwise provided by this Law, the provisions concerning Joint Stock Companies shall apply to the Limited Liability Company; and the phrase “Competent Authority” shall substitute the term “Authority” wherever it appears”.

Putting aside the last phrase which requires interchanging SCA for DED whenever public and private JSC or LLC is concerned, the issue is knowing which JSC provisions in the law apply to LLCs, which is not always obvious.

Article 222 prohibits absolutely financial assistance by a company to a shareholder, and there is no “whitewash” provision to enable a shareholders resolution to approve such support in any circumstances.

Article 222 states in our English translation:

“The company or any of its subsidiaries may not provide financial aid to any shareholder to enable the shareholder to hold shares, bonds, or sukuk issued by the company. In particular, financial aid shall include:

1.To provide loans

2.To provide gifts or donations

3.To provide the assets of the company as security; and

4.To provide a security or guarantee of the obligations of another person.”

The question that arises is whether Article 222 applies to LLCs because of Article 104 and when is it an issue? It is important to know this to determine in acquisition finance whether an LLC is caught by the financial assistance prohibition or not when for instance a target is proposing to finance or to guarantee the acquisition of its shares by another company.

Is there an obvious difference that distinguishes an LLC share from a JSC share which therefore lets an LLC off the hook? Both companies issue shares and have shareholders but in the Arabic text of the CCL, the LLC share is called (English rough translation) a “quota” or a partnership share.  Whilst in JSC the Arabic refers to shares that are negotiable.  So that settles it .....LLCs issue shares that are non negotiable and therefore distinguishable from JSC shares.

Not so because those LLC shares are capable of being pledged as expressly permitted by a new provision in the new CCL under Article 79, which provides that;... “a partner may transfer or pledge its share in the company to another partner or to a third party.”... , . So there is no difference between an LLC and a JSC as both issue forms of negotiable instruments capable of transfer and pledge and both may therefore be caught by Article 222 and both would not be able to provide financial assistance to their shareholders.

Some law firms consider that there is still an argument that an LLC does not issue shares despite the new CCL Article 79, and therefore the LLC is not caught by Article 222 and so can provide financial assistance to its shareholders in LLC acquisition financings. The argument goes that LLCs cannot issue negotiable instruments such as a JSC’s share certificate, but then nor does a private joint stock company issue share certificates, but it is caught by Article 222.

Whist an LLC’s share may not typically be in the form of share certificate nothing prevents an LLC or a private joint stock company from printing its own share certificate as evidence of the share for the purposes say of creating a possessory share pledge to act as security for its financing.

If the legislation prohibits financial assistance for a target JSC company from providing financial assistance to a shareholder to purchase its shares, then why should that be any different for an LLC target providing the same? Logic suggests that the legislation should apply to both LLCs and to JSCs but the matter is not yet settled in the market.

We are left, as always in cases of ambiguity to adopt the prudent cautious approach which is to say that there is no obvious difference and therefore we must advise that Article 222 prohibition applies to LLCs as it does to JSCs. The risk of doing otherwise is potentially huge for an LLC.”

 

 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.