19 Jan 2021

Four key articles to consider in LLC articles

Authored by: Ahmed Hadeed

In brief:

  • The UAE Companies Law no longer requires 51% minimum national shareholding for all companies.
  • It is anticipated that many onshore companies, especially limited liability companies, will be established to explore the resultant onshore opportunities.   
  • Four key articles should be considered when preparing the articles of association of a UAE limited liability company.  

Foreign direct investment has gained further momentum as a result of recent amendments to Federal Law 2 of 2015 concerning commercial companies (Companies Law) which allow for 100% foreign ownership of onshore companies. Increased attention is directed to the limited liability company as an advantageous investment vehicle in the UAE.  

The articles of association of a company are its constitution and they are therefore often referred to as the constitutional document of the company. The articles set out the rules of operation and govern the relationship of the shareholders, the management and the company with each other.

Although companies are governed to a great extent by overriding provisions of the Companies Law, a number of key areas are left to be organised by the articles.

I discuss below four key articles to consider before finalising and signing the articles of a UAE LLC.

  1. Company’s objects

The Companies Law provides that the articles of a company must state the company’s objects. The company may not carry out any business that is not included in its objects. If the management inadvertently involves the company in an activity that cannot be considered within the scope of the company’s objects (and this happens sometimes), this results in breach of the law and might give rise to liability toward the shareholders or third parties.

Accordingly, the objects clause should be drafted carefully to address all anticipated business activities of the company.   

  1. Profits and dividends

The share each shareholder is entitled to receive of the profits realised by a company must be stated in the articles. If not, the Companies Law provides that each shareholder is entitled to receive a share of the profits which is proportionate to its share in the capital.

Dividends are declared in accordance with rules set out in the articles. A legal reserve is imposed by the Companies Law, whereby each company must retain 10% of its profits until the legal reserve is equal to half the company’s capital. Other reserves can also be specified in the articles. The determination of the amount of retained earnings can sometimes be a point of disagreement between the shareholders. Setting out the rules for retained earnings in the articles can prevent such future differences.    

  1. Management structure

A limited liability company can be managed by one person, namely a general manager, or can have a number of directors constituting a board of directors.

  • The general manager structure is easy to deal with. It nominates one person who is the legal representative of the company and responsible for authorising its acts. He or she signs off on relevant matters and is solely responsible before shareholders and the company’s regulators.
  • The board of directors’ structure requires additional consideration. It is important to designate one or more executive directors of the board who are authorised to carry out the day-to-day business of the company, otherwise all directors will have to sign off on relevant matters. 

It is also important to set out the rules that govern how the board takes decisions. Significant matters must be decided by certain majorities or even unanimity in specific cases.

You should also consider setting out procedures for dealing with situations where the board reaches a deadlock. These are situations where half the board is in favour of a decision and the other half is against it. This can be addressed by having the board consist of an odd number of directors or giving the chair of the board a casting vote.

  1. Management powers

The default position under the Companies Law is that the management of a company has full power in relation to managing the company and achieving its objects, except to the extent such powers are restricted by the articles or reserved to the general meeting.

If you do not wish to give full power to the management, you should consider specifying the powers and authorities of the management, together with the decisions that require the approval of the general meeting.

It is important, when outlining the powers and authorities of the management, to use comprehensive language, similar to the language that should be used in delineating the company’s objects. For example, granting the management the right to sell the company’s property might not be regarded by a government authority (e.g. Notary Public) to include the right to sell company’s vehicles unless the ‘company’s property’ is defined to include vehicles.

Recommendation

Business owners are sometimes unclear about the specifics of the articles of their companies. Understanding the legal effects of the key areas in the articles is vital to avoid legal obstacles and challenges.

Should you have any query or require further information in relation to your company’s articles, please feel free to contact Ahmed Hadeed, Partner.