21 Oct 2013


Authored by: Valeria Lysenko



The much awaited new commercial companies law (CCL) is widely expected to enable the grant of registered pledges over shares (or, quotas) in limited liability companies. The effect of the possible legislative development and its potential to aid financing transactions may need to be carefully considered.   
Shares (or quotas) in limited liability companies are moveable property. Pledges over moveables generally are legislated for. Pledges over shares in Onshore LLCs (that is, limited liability companies which are subject to the generally applicable provisions of the current Commercial Companies Law) are not specifically regulated by local law. Notwithstanding, they are possible, in theory.
Currently, the provisions of the Commercial Code which regulate pledges over moveables for a commercial debt (commercial pledges) apply to pledges over shares in Onshore LLCs. The Commercial Code applies to the extent its provisions do not conflict with, and as long as a particular commercial matter is not governed by, another, particular federal commercial law.
Civil Code provisions apply if a question or matter is not determined by contract (to the extent it does not conflict with mandatory commercial provisions, public order or morals) or commercial custom (if there is no specific private agreement, the custom does not conflict with public order or morals and the subject matter is not addressed by commercial law). In practice, local courts apply provisions of the Civil Code to commercial matters which are not specifically regulated by commercial law, including the Commercial Code.
There is currently no federal commercial law which is specific to pledging of shares in Onshore LLCs. The existing Commercial Companies Law does not expressly regulate or contemplate pledges over shares in Onshore LLCs, although some support for the ability to create them arguably exists under its Article 234.  
Commercial Code
The Commercial Code permits a commercial pledge to be proven by any means. However, for share pledges in Onshore LLCs as commercial pledges over moveables to be valid and enforceable as against the obligor or third parties, the following basic conditions need to be satisfied:
(a)   The possession over the pledged shares must be transferred from the pledgor (i) to the pledgee or (ii) to a third party designated by the pledgor and pledgee.
(b)   The pledgee or the designated third party must remain in possession until the pledge is extinguished, or until the pledged shares are placed in “common possession” in such a way as to render the pledgor unable to dispose of the pledged assets “in isolation from the pledgee”.
Civil Code
The Civil Code differentiates between and regulates, in some detail, pledges by way of security (security pledges) and possessory pledges.
Security pledges may be concluded only by their registration. The Civil Code provisions relating to security pledges apply only to those moveables which “special laws” require to be registered. Possessory pledges over moveables require taking and maintaining physical possession of pledged assets.
In essence therefore, it is currently the provisions of the Commercial Code and the Civil Code (which govern commercial pledges and possessory pledges respectively) that need to be satisfied for pledges over shares in Onshore LLCs at least to exist as a matter of statute. The core but non-exclusive practical issue has long been the form and substance of the conclusive documentary evidence of the required transfer of possession and control.
The new federal law concerning commercial companies may prove to be a game changer when it takes effect.
Article 79 of the draft federal law concerning commercial companies in the form approved by the UAE Federal National Council (New CCL) expressly permits a partner in a New CCL Onshore LLC (that is, a limited liability company which would be subject to the generally applicable provisions of the New CCL) to pledge its shares (i) to another partner or (ii) to a third party. The draft further provides that such a pledge will not be valid unless registered in the Commercial Register maintained by the competent local authority.
When the New CCL is brought into effect, the high-level “pecking order” of core local law application to pledges over shares in New CCL Onshore LLCs would be, first, the New CCL, then, the Commercial Code provisions relevant to commercial pledges (to the extent they deal with a matter which is not addressed by the New CCL), and thereafter, the Civil Code provisions which govern security pledges, on the basis of Article 1411 of the Civil Code.
The New CCL appears to indicate that the following would be major requirements which, taken together, would need to be met for share pledges in New CCL Onshore LLCs to be capable of registration:
1.     A pledge to be made in accordance with the terms of the Memorandum of Association
The draft statute appears to require the New CCL Onshore LLCs’ constituent documents to regulate the making of share pledge (as opposed to being silent on the matter or simply permitting them). During the transitional period a cautious approach may be to ensure that the terms of the Memorandum of Association (or equivalent) of New CCL Onshore LLCs are amended where relevant to address internal company share pledge-related requirements and procedures.
While the existing Onshore LLCs would have at least a year from the effective date of the New CCL to amend their constituent documents to comply with the provisions of the New CCL (or face possible statutory dissolution), failure to address the making of share pledges in their constituent documents may affect their ability to facilitate and cause the required attestation and registration of share pledges.
2.     A pledge to be made “under an official document”
The reference to an “official document” in the New CCL appears to indicate that a share pledge agreement would need to qualify as such under the Law of Evidence.
It is hoped that, with the implementation of the recently issued federal and Dubai notary public laws, and the issuance and implementation of executive regulations pursuant thereto, attestation by private notaries would go some way towards taking the workload off public notaries and that, in Dubai, public servants at the relevant local competent authority which maintains the Commercial Register would become registered as notaries under the Dubai notary public law and would be able to facilitate the process further, by permitting share pledge agreements to be signed in front of them.
The two notary public laws require notaries to ensure that documents they attest do not violate law. It may prove to be useful to have a share pledge agreement prepared by local lawyers, or at least reviewed by them for any conflicting provisions. Share pledge agreements with provisions which are contrary to local law should not be capable of notarial attestation and registration in the Commercial Register, or enforcement by local courts.
A share pledge agreement would need to be settled at least in the Arabic language (as the official language of this jurisdiction), before it can be submitted for the attestation and registration.
3.     A pledge to be made “in accordance with the provisions” of the New CCL
Local law practitioners would be well placed to identify the applicable provisions and to advise on statutory prohibitions which may or would affect the ability to grant, maintain and enforce this registerable security. There would be no particular benefit to the parties and the overall transaction if such matters like contravention with financial assistance provisions, statutory restrictions on directors’ powers, the effect of UAE national nominee arrangements on the validity of pledges or transactions with related parties under the New CCL are not given a chance of being carefully considered and advised upon by local lawyers, before the grant of this security is offered or requested.
The date of the entry of a share pledge in the Commercial Register would of course need to be properly documented. Documentary evidence of registration would need to be made available, at the time required by the transaction. Until the process is streamlined and tested at the relevant local authority, a proposal for the requirement to have this local security in place on “day one” should be approached with caution.
It is hoped that some mechanism for running independent third party searches of the Commercial Register, on which third parties could rely and which would ideally block transactions in relation to the target shares for a period of time to permit the pledge registration, would be developed at the level of each local competent authority which maintains the register.
The cost of share pledge registration may prove to be relatively high and should be carefully considered early in the transaction. It would include the cost of legalisation (where relevant), translation (where relevant), notarial attestation and registration. It remains to be seen whether the cap on notarial fees will continue to apply. There is already a degree of significant disparity in the level of security registration fees payable at the local level. The registration fees may be relatively nominal. They may also be a percentage of the amount of the secured loan. In some cases, the percentage is payable on each security document relating to the same secured loan required to be registered with the same local authority. There isn’t always a room for fee negotiations with local authorities. The overall cost of registering share pledges, in addition to other security, such as mortgage over the business or land-related security, can in such cases be considerable and, say, for SMEs, prohibitive.
It will be interesting to see how the law and practice relevant to pledges over shares in limited liability companies develop after the New CCL and a number of other new federal laws are promulgated. The proposed statutory requirement for the registration of share pledges in limited liability companies is on the face of it capable of facilitating financing transactions which involve the requirement for this security. However, much would depend on how economical, quick and transparent the overall process would prove to be, and, perhaps more importantly, what rights secured creditors would have on enforcement of this security, as a matter of law and in practice.

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 develop jurisdiction of the UAE.