01 Oct 2015

THE NEW UAE LAW ON COMMERCIAL COMPANIES: WHAT DOES IT MEAN FOR FOREIGN INVESTORS?

Authored by: Dr. Faraj Ahnish

THE NEW UAE LAW ON COMMERCIAL COMPANIES: WHAT DOES IT MEAN FOR FOREIGN INVESTORS

The long-awaited UAE law on Commercial Companies which, at the date of writing, is in a draft form (New CCL) is expected to be promulgated in the coming months. The New CCL will introduce a number of new provisions, which set out major, and generally welcome, departures from the existing UAE Law on Commercial Companies (Existing CCL).
 
This article highlights some of the major departures sought to be implemented by the New CCL which, if passed into law, are expected to instil confidence in foreign investors, thereby attracting fresh foreign direct investment and enhancing existing foreign investments in the UAE.
 
In brief:

  • After promulgation, the new Commercial Companies Law will bring about a number of important changes which are designed to enhance opportunities available to foreign investors, most notable of which is the possibility of the relaxation of the 49% ownership limit for certain categories of company.
  • Free zone companies seeking to carry out activities outside the free zone will now have to comply with the provisions of the CCL if they wish to carry out business outside the free zone and inside the UAE; however, it is not yet clear to what extent these companies must comply with the new Commercial Companies Law.
  • The new Commercial Companies Law now explicitly provides for and permits mortgages over the shares of LLCs and sets out the process.
  • Foreign companies seeking to open a branch or representative office will no longer be required to appoint a national agent, this is now optional.

Historically, the somewhat restrictive business laws in the UAE including, in particular, the provisions of the Existing CCL, have been a source of discouragement to potential foreign investors. Such investors have always been eager to benefit from the excellent infrastructure, strategic location, cosmopolitan environment, progressive leadership and political stability that the UAE offers, but some held back or may have invested with trepidation, in the absence of the additional security and comfort that comes with full or majority ownership of a company.
 
Some of the more significant changes sought to be brought about by the New Law are summarised below:
 
KEY FEATURES
 
1. Exemption from the 49% rule
Under the Existing CCL, foreign shareholding in a commercial company must not, asageneral rule, exceed 49%. The New CCL grants the UAE Cabinet of Ministers, upon the recommendation of the Ministry of Economy and in coordination with the competent authority in the relevant Emirate, the authority to issue a decree setting out exemptions to the categories of company and activity that might be wholly owned by a non UAE entity or in which the ownership of such foreign entity may exceed 49%. While the New CCL does not provide any additional guidance in respect of the activities that may be set out in the decree, it is expected however that exemptions may be focused on attracting foreign investment to activities of particular importance to the UAE economy, such as certain technologies or industries, and some service sector verticals.
 
2. Energy/Oil Companies wholly/partly owned by the Government
The New CCL allows for certain categories of company to depart from its provisions, including the ownership requirements. These include i) companies in which 25% or more of the capital is owned by either the Federal Government, by the Government of a local Emirate, or by any organ, entity, or company owned by a government body; ii) companies that engage in exploration, production, processing, manufacturing, marketing and transportation of oil; and iii) companies working in any activity relating to any kind of energy or production of electricity and gas or water desalination or transportation and distribution of the same.  
 
3. Explicit restriction on free zone companies
Provisions of the Existing CCL give rise to questions as to the extent, if any, a company incorporated in a free zone may have to comply with its provisions when seeking to carry out activities outside the free zone but within the UAE. The New CCL seeks to end this uncertainty. Free zone companies seeking to carry out activities outside the free zone will have to comply with the provisions of the CCL if they wish to carry out business outside the free zone but inside the UAE. The Minister is expected to issue a Decree setting out the conditions and procedures that must be followed in relation to the registration of free zone companies seeking to carry out activities outside the geographical limits of the free zone but within the UAE. It is not yet clear however to what extent, if any, these companies must comply with the New CCL. The language of the New CCL implies that compliance by such companies will be limited to applying the provisions of the Minister’s Decree rather than having to comply with all the requirements of the New CCL.
 
4. Sole ownership
Under the Existing CCL, a company must be established by at least two shareholders. The New CCL upholds this as a general ruleand permits a departure by allowing one natural or juridical person to incorporate and own all the shares of a limited liability company. The liability of the sole shareholder shall be limited to the capital of the company specified in its memorandum of association.
 
5. Explicit permission to effect a lien on the shares of a limited liability company
Another key element addressed by the New CCL is the ability to effect a lien or mortgage over the shares of a limited liability company. The current provisions of the existing CCL are rather ambiguous on this matter and have left room for disagreement amongst legal professionals as to whether such a lien or mortgage can be legally valid. The New CCL now explicitly provides for and permits mortgages on the shares of LLCs and sets out the process, including the requirement that any such mortgage take the form of an official document notarised in accordance with the applicable provisions of UAE law. Such a transaction may not be enforceable against a company or third parties unless it is registered in the commercial register held by the competent authority.
 
6. Nationality of Board of Directors of a listed company
The provisions of the Existing CCL require that the majority of the Board of Directors of a Public Joint Stock Company must be comprised of UAE nationals. [Under the New CCL, this requirement will no longer apply to companies whose shares are wholly owned by a foreign investor and wherein the percentage ownership held by the foreign investor in the company exceeds 49%.]
 
7. Permission to have authorised and issued capital
The share capital of a company under the Existing CCL, although could be partly paid, must be fully issued. This applies to all forms of company, including public shareholding companies. The New CCL amends this rule, allowing for a public shareholding company to have both authorised capital and issued capital. Such authorised capital must not be more than double the amount of the issued capital.
 
8. A strategic partner
Under the New CCL, certain restrictions applicable to the increase of share capital of a public shareholding company (such as the pre-emptive rights of the existing shareholders) may not apply in the event that the shareholders of the company (by a majority of two-thirds) approve subscription in the full increased capital by a strategic shareholder. The Chairman of SCA, Engineer Sultan Bin Saeed Al-Mansoori, shall issue a Decree which sets out the terms and procedures for permitting a strategic partner to become a shareholder in a public shareholding company.
 
9. Issuance of shares for the implementation of employees incentive scheme
Under the New CCL, certain restrictions applicable to the increase of share capital of a public shareholding company (such as the pre-emptive rights of the existing shareholders) may not apply in the event that the shareholders of the company (by a majority of two-thirds) approve the increase of the capital of the company for the purpose of implementing incentive schemes for the employees of the company enabling them to own shares in the company. The Board of Directors of the Company may not participate in the scheme, but there is no provision in the New CCL which restricts or prohibits ownership of such shares by employees of the company who are not UAE nationals. The law however is silent on whether such ownership is to be included for the purposes of the general restriction on maximum ownership by foreigners in the share capital of a company.
 
10. Branch/Representative office of a foreign company
Foreign companies seeking to open a branch or representative office will no longer be required to appoint a national service agent. However, foreign companies are still able to appoint a national service agent, if they desire. The national service agent must of UAE nationality. The obligations of an agent vis-à-vis the foreign company and third parties is limited to the provision of any services required by the foreign company without the agent being a beneficiary of, or liable for, any financial rights or obligations relating to the activities for business of the foreign company inside or outside the UAE.
 
CONCLUSION

In conclusion, it may reasonably be said that the New CCL is a step in the right direction that will contribute to providing some of the comfort and confidence that foreign investors had sought in the past.