06 Jun 2016

New Ministerial Resolution clarifies application of Commercial Companies Law to LLCs

Authored by: Bilal Snaineh

New Ministerial Resolution clarifies application of Commercial Companies Law to LLCs

In brief:

  • Ministerial Resolution 272 of 2016 has been issued to address issues of interpretation in respect of Article 104 of the Commercial Companies Law (Federal Law No. 2 of 2015) (“CCL”), in order to clarify the application of provisions of the CCL relating to joint stock companies (“JSCs”) in relation to Limited Liability Companies (“LLCs”).
  • Some provisions are confirmed to apply to LLCs, whilst others shall not apply, including financial assistance and certain aspects of management.
  • However, other parts of the CCL may require future clarification, including the issue of loans to directors.


Article 104 has been the subject of much debate since the new UAE Commercial Companies Law (Federal Law No. 2 of 2015) (“CCL”) came into force last year. According to Article 104, all provisions in the CCL relating to joint stock companies (“JSCs”) apply equally to Limited Liability Companies (“LLCs”), unless otherwise stated in the law. 

In the absence of guidance, different interpretations have developed on how Article 104 should be applied. As a consequence, application has been inconsistent. Coupled with contradictory interpretation, the overreaching application of Article 104 has created a number of anomalies that may not be applicable to LLCs. For example, applying the prohibition on financial assistance to LLCs in the context of acquisition finance could result in difficulties particularly for businesses where ownership and management are not separate.  

In recognition of the myriad of issues relating to the application of Article 104, the Ministry of Economy recently issued Ministerial Resolution 272 of 2016 (“Resolution”) to clarify the intended application of Article 104. 

Having come into force on 29 April 2016, the Resolution clarifies which provisions relating to JSCs also apply to LLCs and which provisions do not apply to LLCs: 

New (or amended) provisions that apply to LLCs:

 

  1. Liability of the board of managers.  Managers of LLCs can now be held liable to the LLC and/or its shareholders for ‘errors in management’ and these errors no longer need to be ‘gross errors’.
  2. Calling general assembly meetings.  Previously under Article 92 of the CCL, the management of LLCs had to call a general assembly meeting if requested to do so by shareholders holding at least 25% of the share capital of the LLC.  The Resolution however has reduced this threshold to 20%. 
  3. Suspending the implementation of general assembly resolutions.  In limited circumstances and based on a specific procedure, minority shareholders (i.e. those holding at least 5% of the issued share capital) can now request that the Department of Economic Development (“DED”) suspend the implementation of shareholder resolutions which have a detrimental effect on them. The DED will only agree to suspend a resolution if the grounds for suspension are sufficiently serious. 
  4. DED appointed boards.  If shareholders fail to appoint a manager or a board, or do not appoint managers in two consecutive meetings, the DED may, in certain circumstances, appoint temporary management for the LLC for a period of one financial year. If after one year the shareholders have still not appointed a new board then the DED and its temporary board may, amongst other things, dissolve the company. 
  5. Auditors. Auditors of an LLC cannot be appointed for a term longer than 3 years. The auditor must be independent and must not, directly or indirectly, own shares in the LLC. The auditor must report to the DED if the LLC has violated the CCL. The auditor should each year, at the general meeting, read to the shareholders the annual audit report which sets out key information on the LLC. The auditor’s report should be submitted to the DED (although, in practice, companies still do not file their accounts or reports with the DED, and it remains to be seen whether the DED will, going forward, move to facilitate such filings). Any suggestion that an LLC is required to replace its auditor each three years can, based on the introductory wording to the relevant provision, be interpreted to only apply if it does not ‘conflict with the nature of the company’. Although there is no guidance on such conflict, it should be expected that many closely held or small businesses will determine that they are not be required to rotate their auditors.


Provisions that do not apply to LLCs: 

  1. Management.  Articles relating to the formation, election, number, nationality, and, remuneration of the board of directors of JSCs shall not apply to LLCs. LLCs cannot, however, call their general assembly before the Board has held its own meeting, which must take place at least 30 days prior to the proposed date of the general meeting. Notice of the meeting must be given to the shareholders along with a detailed agenda for the meeting and, amongst other things, details on voting rights and relevant quorum.   
  2. Related party transactions.  The provisions of the CCL on related party transactions do not apply to LLCs. 
  3. Restriction on the authorities of the board.  Unless otherwise stated under the LLCs constitutional documents, management powers are not restricted in the same way as they are for JSCs. For example, management in LLCs have the power to discharge debtors, make compromise agreements or agree to arbitration and, among other things, enter into loans for periods exceeding 3 years without the need to first seek shareholder approval (or to have such powers enshrined in the Memorandum of Association). It is still permitted, however, to include in the Memorandum of Association a restriction on the exercise of such power without prior shareholder approval.  
  4. Financial assistance.  It is not prohibited for financial assistance to be given in relation to the acquisition of the shares in an LLC. Although the Resolution is silent on this point, we believe that financial assistance would be prohibited by an LLC in respect of the acquisition of a parent PJSC’s shares. 

Additional rules which apply to LLCs

The Resolution also contains additional rules which apply to LLCs. These include the following:

  1. A special resolution is now needed for the sale of 51% or more of the LLC’s assets by one or more transactions in any one-year period.
  2. A special resolution is now needed for any assignment of voluntary contributions for community service purposes (i.e. charitable contributions).
  3. Shareholders holding 10% of the share capital of an LLC can now call an urgent general meeting by application to (and with approval from) the DED. Shareholders now also have a prescribed procedure for adding items to the agenda of a general meeting either before or during those general meetings.    
  4. If the LLC is managed by a board of managers, then the chairman and deputy must be appointed at a general meeting. 

Despite the additional rules and clarifications highlighted above, a number of issues remain. For example, the prohibition on loans to directors and their family members has not been addressed by the Resolution. As such, on the face of it, loans to directors would continue to be prohibited by virtue of Article 104 of the CCL. 

Notwithstanding this, the Resolution is a welcome development and has provided further guidance on the applicability of the CCL to LLCs.   

 

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.