15 Dec 2020

Foreign Ownership Enhancement: Liberalisation of the UAE’s Foreign Direct Investment Regime

Authored by: Ahmad Sergieh

In brief:

  1. Opportunities for foreign investment and ownership in the UAE have been further enhanced.
  1. The overhaul of the UAE Companies Law involves the amendment of fifty one (51) articles of the Law.
  1. This includes the addition of important new articles relating to limited liability companies and public joint stock companies.

The UAE President, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, issued on 27 September 2020 the Federal Decree promulgating Law No. 26 of 2020 (“Decree”) pursuant to which fifty one (51) articles of Federal Law no. 2 of 2015 regarding Commercial Companies (“UAE Companies Law”) are amended. This overhaul includes the addition of important new articles relating to limited liability companies and public joint stock companies.

Understandably, the aspect of the Decree which has attracted most interest from media and investors is the modification of Article 10 of the UAE Companies Law, which currently requires a UAE national or an entity wholly owned by UAE nationals to hold at least fifty one percent (51%) of the share capital of each UAE company that is incorporated ‘onshore’ (which term is commonly used to exclude free zones).

Article 10 has been amended to remove the specific requirement for a minimum of 51% UAE shareholding in onshore entities. However, it is also stated that the threshold required for UAE ownership (if any) will be determined by the Cabinet upon the recommendation of a committee, comprising members of a number of governmental departments, which will determine which activities are considered to have a ‘strategic impact’ in order for foreign investors to be entitled to hold up to 100% of the legal interest in such companies.

Once details of the relevant activities deemed to have a ‘strategic impact’ are published, we will be able to advise on the extent to which the proposed changes to Article 10 of the UAE Companies Law will reflect the recent enactment of the Foreign Direct Investment Law (“FDI Law”) and/or further expand the possibilities for foreign ownership. By way of background, the FDI Law was issued on 23 September 2018, paving the way for relaxation of foreign ownership restrictions, and is repealed under the Decree.

Under the FDI Law, a committee called the Foreign Direct Investment Committee was formed by a Cabinet resolution and was tasked with developing economic policies for the implementation of the FDI Law including the following:

  1. setting out a list of economic activities that may be carried out by a company wholly owned by foreign investors (‘Approved Activities List’);
  1. approving foreign investment projects to conduct activities that are not set out in the Approved Activities List following recommendations made by the relevant licensing governmental departments; and
  1. deciding on the benefits granted to specific foreign investment projects.

The Cabinet had to take into account the following main considerations when making decisions pursuant to the FDI Law:

  1. integration with strategic plans of the UAE;
  1. achieving good returns and added value to the national economy;
  1. increasing the level of innovation in the national economy;
  1. providing job opportunities for UAE nationals;
  1. impact on national companies engaged in similar activity;
  1. competence, experience and international reputation of a foreign investor;
  1. utilization of modern technology; and
  1. whether the activity achieves a positive impact on the environment.

We would expect similar criteria to be considered by the committee to be formed under the Decree when assessing whether particular activities have a ‘strategic impact’.

After the committee approves the list of activities, the relevant licensing governmental departments must set out the procedures to be followed in connection with the establishment of a company performing each such activity in the UAE.

Although, as was the case with the FDI Law, the Decree amending Article 10 of the UAE Companies Law does not immediately identify which sectors will benefit from the relaxation of the current foreign ownership restriction, it is a welcome and important item of legislation that should substantially contribute in further enhancing the attraction of the UAE as a business hub for foreign investors.

We set out below further key amendments which have been introduced under the Decree.

  1. Certain entities partly (or wholly) owned by the government in certain specific sectors will be exempt from the provisions of the Decree.
  1. The entire issued share capital of a limited liability company (LLC) may now be held by a single non-UAE shareholder (subject to the above with respect to the relevant activities being considered of ‘strategic impact’).
  1. The memorandum and articles of association of a LLC (“AoA”) must include provisions dealing with dispute resolution mechanisms between the LLC and any of its directors/managers or between the shareholders in connection with the LLC’s business.
  1. A shareholder holding ten percent (10%) of the share capital of the LLC may request a General Assembly to convene (previously the threshold was twenty five percent (25%)).
  1. The notice period to convene a General Assembly is at least twenty one (21) days (previously fifteen (15) days).
  1. Unless the AoA states otherwise, quorum for a General Assembly meeting is at least fifty percent (50%) failing which a second meeting must be held within at least five (5) to fifteen (15) days from the date of the first meeting, such second meeting would be quorate irrespective if the number of shareholders attending (previously quorum for first meeting was at least 75%, second was 50% and third would be quorate irrespective of attendance of shareholders).
  1. A mechanism has been introduced whereby a shareholder may seek an urgent court order pursuant to which the other shareholders are required to fund an increase of capital to the extent necessary to prevent the liquidation of the company. If a shareholder fails to pay the capital amount required then his share in the company would be diluted accordingly.
  1. In the event that a manager is named in the AoA, it should now be possible to amend the AoA to replace such manager without being subject to the minimum statutory 75% shareholding approval.
  1. The Cabinet will issue a decision confirming which provisions relating to joint stock companies will be applicable to LLCs taking into account the nature of a LLC.
  1. Branches of foreign companies are no longer required to appoint a national service agent.
  1. Changes, in relation to public listed companies, including in respect of contributions in-kind, the public subscription threshold, and general assembly procedures which will be the subject of a further article.

Subject to articles specified therein, the Decree shall come into force on 2 January 2021. Also, existing companies must adjust their position within one (1) year of the Decree coming into force, and companies which fail to do so shall be considered as dissolved.

Conclusion:

Law No. 26 of 2020 is an extremely important development in relation to the UAE Companies Law and foreign direct investment in the UAE. For more information, please contact Ahmad Sergieh, Partner, Head of Corporate, Dubai a.sergieh@hadefpartners.com or Yasser Omar, Partner, Head of Corporate, Abu Dhabi y.omar@hadefpartners.com.

 
 

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.