11 Apr 2016


Authored by: James Farn


Article 222 of the new Commercial Companies Law (Federal Law No. 2 of 2015) (New CCL) makes it unlawful for a joint stock company (or any subsidiary company of that company) whose shares are being acquired to give financial assistance for the purpose of that acquisition.

The principle also extends to the acquisition of any bonds, sukuk or other financial instruments capable of being issued by a joint stock company (JSC). 

As in other legal jurisdictions, the prohibition on financial assistance is concerned primarily with the maintenance of a company’s capital base. The principle is that a company may not return assets to its shareholders except in certain circumstances, such as a dividend payment or a distribution in a (solvent) liquidation of a company. 

The general ‘mischief’ which the law seeks to prevent is the assets of a company (or any of its subsidiaries) being used to assist an outside party acquiring or holding an ownership interest in that company. The assets of a company (or any of its subsidiaries) should be preserved for the benefit of that company’s creditors and (at least whilst the company is solvent), the company’s shareholders.

Application of rule against giving of financial assistance under UAE federal law 

Article 222 goes on to describe the nature of financial assistance. It includes a loan, a gift or donation, the granting of a security interest over a company’s assets or a guarantee for the obligations of another person to a third party (which could be with or without security). 

Article 222 applies specifically to joint stock companies, whether they are a public joint stock company or a private joint stock company. 
The prohibition in Article 222 is strict. There is no ‘whitewash’ or approval procedure to authorise or ‘bless’ the giving of the assistance (in whatever form that assistance may take).  
The most common form of assistance in the context of acquisition finance usually occurs where a company whose shares are being acquired (the Target) gives security in favour of a third party lender to assist another person (the buyer) in the acquisition of its own shares from an existing shareholder (the seller). The security given by the Target over its own (company) assets secures the buyer’s repayment obligations to the lender by way of third party security. 

Article 222 requires that the assistance given:
(a)    should  be for the purpose of acquiring or holding the shares in, or a debt obligation assumed by, the JSC; and 

(b)    should be ‘financial’ in nature.

The term “financial assistance” is obviously wider than purely monetary assistance. It could include, for example, a transfer of any of the company's assets for use in buying shares or acquiring debt as well.

Provided that the financial assistance is given and it is for the purpose of the acquisition, the identity of the recipient of the assistance seems to be irrelevant under Article 222, so long as the assistance ‘enables’ the (new) shareholder to hold shares, or ‘enables’ a person to acquire debt.

The giving of the assistance is not limited in time either, so it does not matter how long the period is between the acquisition and the provision of the assistance. The Article 222 prohibition could therefore extend to cover any financial assistance given by the Target (or any subsidiary company of the Target) for the purposes of reducing or discharging any liability incurred for the purpose of the acquisition – for example, to refinance a pre-existing debt obligation incurred by a buyer of the Target’s shares where the ‘new’ debt is also secured over the Target’s assets.  

Does the prohibition on financial assistance applicable to a JSC also apply to a private limited liability company (LLC)? 

This is the question that has been causing many practitioners difficulty over the last few months. The relevant provision in the New CCL is Article 104. This says that the provisions in the New CCL (as they apply to a JSC) will also apply to a LLC, except where there are express provisions to the contrary.  Articles 71 to 104 of the New CCL (comprising Part 3 of the New CCL) apply specifically to a LLC. There is no provision in Part 3 of the New CCL which specifically dis-applies Article 222, and there are no other provisions in Part 3 that relate to financial assistance.

In what circumstances would the giving of assistance be relevant to a LLC? 

Whether a LLC is caught by Article 222 depends in our view on the answer to two questions:
(a)    Is the LLC prohibited (as a subsidiary of a JSC) from providing assistance for the acquisition of shares or other securities of the JSC – otherwise known as ‘upstream financial assistance?’
(b)    Is the LLC (or any of its subsidiaries) prohibited from providing assistance for the acquisition of an interest in itself - generally known as ‘direct financial assistance?’
The general market view (with which we agree) seems to be that ‘upstream’ financial assistance where given by an LLC would be prohibited. Article 222 clearly applies to a JSC. To allow a subsidiary LLC to give the assistance instead of the JSC itself would be an obvious way of avoiding the prohibition. This was clearly not the legislator’s intention. 
Whilst there are no decided cases on the point, the generally-held view also appears to be that an LLC can give direct financial assistance (and is therefore free from the prohibition contained in Article 222).  We agree with this for a number of reasons. 

1. Ownerships interests in a PSC and in an LLC are different 

Although, in broad terms, both a PSC and an LLC have share capital and shareholders, the terminology used to describe the respective ownership interests in each type of company is different. In the Arabic text, the LLC share is called (in a rough English translation) a ‘quota’ or a partnership share (hesas). In a JSC, the Arabic text refers to shares that are ‘negotiable’ (as-shum).

The term ‘negotiable’ in this sense means transferable or capable of being bought and sold by delivery and without restriction. The principle is similar to that associated with the concept of a ‘negotiable instrument’ such a cheque or other form of promissory note (by which the right to receive payment under that instrument may be transferred by simple endorsement and delivery).  

2. The ability to transfer or create security over a share or a ‘quota’ in an LLC does not make it the same type of asset as a negotiable share.  

Although the New CCL allows a partner in an LLC to ‘... transfer (or to pledge) its share in the company to another partner or to a third party’, the ability to transfer is subject to statutory pre-emption rights in favour of the non-transferring shareholder(s). An ownership interest in an LLC is therefore not regarded as ‘negotiable’, because ownership (irrespective of the manner in which title may be perfected – for example, by registration procedures) cannot freely pass by delivery alone.    

3. A share (as-shum) must have an equal (or the same nominal) value. This is because a share is capable of being traded on a market. If it has the same nominal value, its price will be determined solely by supply and demand – or in other words, its commercial value will be determined by the market in which it is traded.

JSC’s by their nature are subject to greater regulatory oversight (including rules concerning maintenance of capital) than LLC’s. These additional controls are not necessary for LLC’s where there is no defined market for their shares and where there is typically a close personal relationship between its partners and where transfers of shares are subject to statutory pre-emption rights. Each shareholder in an LLC is presumed to know the identity of the other(s).  

4.  Article 104 does not create a blanket rule that all the provisions which apply to a JSC must also apply to an LLC.  Whether a specific JSC provision applies to an LLC is a question of analysing the nature of each provision in question and then deciding whether or not it has mandatory application in the context of an LLC.

Even if practitioners generally were to take a more cautious view on the direct financial assistance prohibition and conclude that the position remains open, the UAE Commercial Transactions Law (CTL) provides assistance. Some practitioners wrongly assume that under a civil code system, if there is no specific provision of law to deal with a specific issue, then it must be prohibited. For commercial transactions (such as a financial transaction), the exact opposite is true. Freedom of contract prevails unless a specific contractual provision conflicts with a mandatory provision of law. Where the law provides no assistance, the CTL then allows the rules of commercial practice (including general or international practice) to be applied.  

Some legal jurisdictions are now removing the prohibition on financial assistance for private limited liability companies. 

English law, for example, has removed the prohibition on a private limited liability company from giving financial assistance for the acquisition of its own shares. The repeal of the previous prohibition and the ‘whitewash’ procedure applicable to private companies aims, among other things, to simplify private company acquisitions.

There is also a qualified prohibition on the giving of financial assistance by a private limited company incorporated in the DIFC.  

The New CCL would therefore be ‘out-of-step’ with public policy in other legal jurisdictions if it were to apply an absolute financial assistance prohibition on LLC’s.

A blanket prohibition on financial assistance for LLC’s would also make activity in the M&A and acquisition financing markets very restricted. 

5. Assuming that a company is solvent at the time that the assistance is given (and is likely to remain solvent as a result of giving that assistance), if the assistance does not have the effect of reducing the company’s net asset position, it would be difficult to argue that any of the key rules concerning maintenance of capital would be breached or that the interests of a company’s creditors or shareholders are prejudiced. 

Some forms of assistance as described under Article  222 – for example, the granting of security over a company’s assets - would not necessarily reduce the asset base of the Target company (or diminish the value of the assets being secured) because the Target company (at least whilst it remains solvent) retains the right to redeem, sell or re-mortgage the pledged assets.

The UAE Civil Code also has separate provisions which allow an affected creditor (or group of creditors) to ask a Court to set aside certain voluntary ‘dispositions’ of assets (irrespective of the purpose for which they are made) if the effect of a disposition (i.e. a transfer of an asset at an undervalue or a gift) is detrimental to the company’s creditors and is made at time when the company’s assets are less than is liabilities. These provisions are separate from the ‘clawback’ provisions which apply in the context of a company’s bankruptcy (as described under the UAE Commercial Transactions Law), but provide an additional measure of creditor protection to a company’s creditors in a pre-bankruptcy situation. 


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.