Business setup Dubai & Corporate Governance – UAE Commercial Companies law and legal reforms
By Nabilah Karbal, Associate at Karbal & Co’s Dubai Office.Â
Federal Law No. 2 of 2015 â€œThe New Commercial Companies lawâ€ (CCL), which came into force on July 1, 2015, replacing the Federal Law No. 8 of 1984. The purpose of the new legislation was to bringing the UAE up to speed with corporate legislation currently enacted in many developed nations. The New CCL requires that corporations subject to the legislation amend their articles of association and memoranda to comply with the legislation’s new provisions. Failure to amend a corporationâ€™s articles of association before June 30, 2016 will result in the dissolution of the company.
The purpose of this article is to highlight certain changes and new additions enacted by the new legislation, and what corporations and shareholders need to know.
Applicability and scope of the New Commercial Companies Law
The scope of the new legislation covers a variety of areas of ownership and corporate governance rules for different company models and concerns the protection of shareholders and fiduciary duties of directors.
Although the CCL suggests that it applies to all commercial companies, the CCL is not applicable to free zone companies (Article 5 of the CCL). Article 5 of the CCL will only apply to free zone companies if they operate outside of their designated areas.
Furthermore, Article 4 stipulates that certain companies are not subject to the new CCL. These companies include
(1) Companies that the federal cabinet had specifically exempted from application due to resolution;
(2) Companies that are wholly or partially owned by the federal or local government; and
(3) Companies of which the federal or local government owns 25% or more and which operate in the oil, gas, and power sectors.
Foreign ownership: Restrictions codified
The UAE provides a system of ownership where foreign ownership is restricted to 49% of the company’s shares and where the remaining 51% is required to be owned by an Emirati national. With the new CCL, Article 10(1) provides that the restrictions must be strictly observed, as any share transfers to foreign nationals greater than 51% will be invalidated. With the original CCL, this provision was nonexistant.
Fiduciary duties (the duties of Directors and Managers)
Fiduciary duty can be defined as a duty owed by an agent to a principal. For a corporation or business entity that is an independent person, directors and managers owe a fiduciary duty to the corporation. Corporate laws of jurisdictions of developed nations impose a duty of ordinary care and prudence on a director and manager. Article 22 of the New CCL imposes the duty for directors to act with the care of a â€œprecise person.â€ Prior to the New CCL, fiduciary duties of directors and managers had not been codified.
In its attempts to protect corporations, Article 24 of the new CCL provides that all provisions exempting directors and managers from personal liability are void.
A form of a “duty not to compete” requirement has been enacted in Article 86 of the New CCL, which applies specifically to limited liability companies. Article 86 stipulates that a director of a company is not allowed to manage or govern another company unless the director obtains the consent of the company for which she is already a director.
Updated Accounting Requirements
The Enron crisis is considered the event which highlighted the importance of the role of accountants. As a reaction, legislation in developed nations, such as Sarbannes-Oxley, set into force accounting requirements to which many jurisdictions now adhere.
In the UAE, accounting requirements were already in force prior to the New CCL. However, the New CCL brings accounting requirements up to international standards. Article 26 of the New CCL stipulates that business entities subject to the new legislation are required to retain accounts of books at their relevant head offices for five years. The aim is to give shareholders and directors an accounting of profit and loss for a given period.
Introduction of Holding Companies into UAE legislation
Although â€œgroupsâ€ exist in the Emirates, Article 266 of the new CCL legally recognizes the existence of holding companies in the UAE.
Rules applicable to Joint Stock Companies
Responsibility of board of directors
For both private joint stock companies and public joint stock companies, the board of directors shall be held accountable for compliance with corporate governance framework. Article 6 and 7 of the New CCL provides that failure for a director may result in a statutory penalty of up to 10 million AED.
Rules applicable to Private Joint Stock Companies
The New CCL provides that the Minister of Economy shall issue resolutions concerning a corporate governance framework for companies with more than 75 shareholders.
Rules applicable to Public Joint Stock Companies
The Securities & Commodities Authority shall issue the resolution regarding the corporate governance framework. The framework will include rules relating to the corporate governance applicable to the a public joint stock company.
Modern securities regulation, such as Sarbannes-Oxley, provides rules on independent auditors. The New CCL provides that all public joint stock companies must have at least one or more auditors that are nominated by the board of directors. The new CCL further provides that all auditors must be thereafter approved by the general assembly.
Article 243 of the New CCL provides that the mandate of the auditor shall not exceed 3 successive years. The reasoning behind this is most likely the same as other western jurisdictions. A restriction on the employment of an auditor aims to ensure independence from the corporation, and genuine auditing of the books.
Protection of Minority Shareholders
Protection of a class of shareholders
In order to protect a specific class of shareholders, Article 170 of the New CCL provides that the class may seek to void any resolutions passed for or against the class.
Petitioning the court against actions that are detrimental to a shareholder
Western jurisdictions provide certain safeguards to protect minority shareholders. Article 164 of the New CCL provides the possibility for a shareholder who owns more than 5% of total outstanding shares the possibility of petitioning the competent court of the Securities & Commodities Authority for any actions of the company (board of directors) that are against the interests of any of the shareholders. This condition is common place in many jurisdictions, such as New York, where shareholders with a 20% ownership share of a closed corporation may petition a court for dissolution for a number of reasons, i.e., reasonable expectation of governance.
Rules applicable to Limited liability companies
New rules for sole shareholders
Prior to the New CCL, the concept of a sole shareholder was non-existent in the UAE legislation. Article 71 of the New CCL recognizes the right of one natural person or a corporate entity to be a sole shareholder of an LLC.
Number of directors
Many jurisdictions require that the the articles of association or by-laws to stipulate the number of directors and managers of a company. Article 83 of the New CCL requires that the number of directors to be set in the articles of association and a companyâ€™s memorandum.
Valuation of shares for shareholders for non-cash consideration
Valuation of shares for shareholders is essential to equity ownership. The valuation enables shareholders to obtain an accurate value of the ownership for the purpose of purchase or sale of equity. Due to the importance of the valuation of equity within financial centers and seeing as Dubai is growing into a regional financial hub, we understand the need for the addition to UAE legislation.
Article 78 of the New CCL provides that shares will be valued in non-cash consideration or â€œin-kind.â€ The valuation of the shares can be done in one of two ways, either (1) the shareholders agree to determine the value of their shares, which shall be approved by the Department of Economic Development, or (2) a financial consultant approves the value of the shares, where the value is also subject to approval by the Department of Economic Development.