By Nabilah Karbal, Associate at Karbal & Co’s Dubai Office.Â
Federal Law No. 2 of 2015, The New Commercial Companies (CCL), came into force on July 1, 2015, replacing Federal Law No. 8 of 1984. The purpose of the new legislation was to bring the UAE up to speed with corporate legislation enacted in many developed nations. The New CCL requires corporations subject to it to amend their articles of association and memoranda to comply with its new provisions. Similar risks arise during the pre-contractual negotiation period in government contracts. Failure to amend a corporation’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.
The scope of the new legislation covers a variety of areas of ownership and corporate governance rules for different company models, and it concerns the protection of shareholders and the fiduciary duties of directors.
Although the CCL suggests that it applies to all commercial companies, it does not apply to free zone companies (Article 5 of the CCL). Article 5 of the CCL will apply to free zone companies only if they operate outside their designated areas.
Furthermore, Article 4 stipulates that certain companies are not subject to the new CCL. These companies include:
(1) Companies specifically exempted from application by resolution of the federal cabinet; (2) Companies wholly or partially owned by the federal or local government; and (3) Companies in which the federal or local government owns 25% or more and that operate in the oil, gas, and power sectors.
General rules
The UAE has a system of ownership in which foreign ownership is limited to 49% of a company’s shares, with the remaining 51% required to be held by an Emirati national. Under the new CCL, Article 10(1) provides that these restrictions must be strictly observed, and any share transfer to foreign nationals exceeding 51% will be invalidated. Under the original CCL, this provision did not exist.
Fiduciary duty is the duty owed by an agent to a principal. For a corporation or other business entity treated as an independent person, directors and managers owe a fiduciary duty to the corporation. Corporate laws in developed jurisdictions impose a duty of ordinary care and prudence on directors and managers. Article 22 of the New CCL imposes on directors the duty to act with the care of an “ordinary person.” Prior to the New CCL, the fiduciary duties of directors and managers had not been codified. To protect corporations, Article 24 of the new CCL provides that all provisions that exempt directors and managers from personal liability are void.
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 may not manage or govern another company unless the director obtains the consent of the company for which she is already a director.
The Enron crisis is widely regarded as the event that highlighted the importance of the accountants' role. In response, legislation in developed nations, such as the Sarbanes-Oxley Act, established accounting requirements that many jurisdictions now follow.
In the UAE, accounting requirements were already in force before the New CCL. However, the New CCL aligns these requirem international standards. Article 26 of the New CCL requires business entities subject to the new legislation to retain books of account at their relevant head offices for five years. The aim is to provide shareholders and directors with a profit-and-loss accounting for a given period.
Although they exist in the Emirates, Article 266 of the new CCL formally recognizes holding companies in the UAE.
For both private and public joint-stock companies, the board of directors shall be held accountable for compliance with the corporate governance framework. Articles 6 and 7 of the New CCL provide that failure by a director may result in a statutory penalty of up to 10 million AED.
The New CCL provides that the Minister of Economy shall issue resolutions establishing a corporate governance framework for companies with more than 75 shareholders.
The Securities & Commodities Authority shall issue the resolution regarding the corporate governance framework. The framework will include rules on corporate governance applicable to a public joint-stock company.
Modern securities regulation, such as the Sarbanes-Oxley Act, sets rules governing independent auditors. The New CCL provides that all public joint stock companies must have at least one auditor who is 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 auditor's mandate shall not exceed 3 successive years. The reasoning behind this is most likely the same as in other Western jurisdictions. A restriction on the auditor's employment aims to ensure independence from the corporation and genuine auditing of the books.
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 it.
Western jurisdictions provide certain safeguards to protect minority shareholders. Article 164 of the New CCL allows a shareholder who owns more than 5% of the total outstanding shares to petition the competent court of the Securities & Commodities Authority regarding any actions of the company (board of directors) that are contrary to the interests of any shareholder. This condition is common in many jurisdictions, such as New York, where shareholders with a 20% ownership share in a closed corporation may petition a court for dissolution for a number of reasons, i.e., reasonable expectation of governance.
Before the New CCL, the concept of a sole shareholder did not exist in UAE legislation. Article 71 of the New CCL recognizes the right of one natural person or a corporate entity to be the sole shareholder of an LLC.
Many jurisdictions require that the articles of association or bylaws specify the number of a company’s directors and managers. Article 83 of the New CCL requires that the number of directors be set in the articles of association and a company’s memorandum.
Share valuation is essential to equity ownership. It enables shareholders to determine the accurate value of their ownership for the purpose of purchasing or selling equity. Given the importance of equity valuation within financial centers and Dubai's growth into a regional financial hub, we understand the need for an addition to UAE legislation.
Article 78 of the New CCL provides that shares will be valued in non-cash consideration. 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.
