1 July 2015 marked the entry into force in the United Arab Emirates (the UAE) of Federal Law No.2 of 2015 on Commercial Companies (the CCL), the long-awaited successor legislation to Federal Law No.8 of 1984 Concerning Commercial Companies (the Old Law).

In contrast with the Old Law, the CCL explicitly sets out a bold objective – to contribute to the development of the working environment in the UAE, and to the capacity of the UAE to regulate companies according to international norms, protection of shareholders, the support of foreign investment and promotion of corporate social responsibility. This briefing considers some of the more notable differences between the Old Law and the CCL.

1.  Overview

The CCL is a welcome update of the Old Law, containing a significant degree of clarification on various matters where accepted practice and convention had previously helped fill in the gaps of what was either a refreshingly short and concise Old Law, or a piece of legislation no longer fit for its purpose of governing twenty-first century corporations in a nation as dynamic and ambitious as the UAE, depending on one's point of view.

Improvements have been made which build on the Old Law and there is a great deal more detail included on, for example, the manner in which joint stock companies conduct their affairs from an internal corporate governance perspective. However, the CCL constitutes more an evolution than the revolution some industry commentators had been hoping for; a good example of this being the resolute retention of the Old Law's foreign ownership restrictions, which require at least 51 per cent of any "onshore" limited liability company (LLC) to be registered in the name of a UAE national.

It is particularly important to note that all UAE companies are required to amend their Memorandum of Association (MoA) to comply  with the CCL by 1 July 2016, and that companies which do not do so risk being dissolved.

2.  Application of the CCL

The CCL applies to all companies, and branch or representative offices of foreign companies, established in the UAE save for any entities specifically exempted from the CCL. While exemptions applied in the Old Law, the list of exempted entities in the CCL is more detailed and now includes, for example, energy or utility companies in which federal or local government holds at least 25 per cent of the share capital.

Another new exemption relates to entities established in any of the UAE's numerous free zones (assuming the relevant free zone regulations specifically exclude application of the CCL). The CCL clarifies that to the extent free zone companies are permitted by their free zone authority to operate outside the free zone, and where such companies do in fact operate outside the relevant free zone, the CCL still applies to such onshore activities.

Intriguingly, provision is made for UAE Cabinet decisions to be issued in due course which determine the procedure for registration, onshore, of free zone companies wishing to conduct business outside their relevant free zone. It will be interesting to see if, and how, such decisions might be implemented, especially given the apparent difficulty in reconciling onshore foreign ownership restrictions with the concept of a free zone company – itself unlikely to be subject to any equivalent restrictions within its free zone, and potentially wholly-owned by a foreign parent company – conducting business onshore.

3.  Limited Liability Companies

The survival of the 51/49 foreign ownership split for LLCs noted above is just one of a number of noteworthy elements of the CCL. The old definition of what it means to be a "company" – requiring, inter alia, a commitment to participate in an economic enterprise with the objective of profit realisation, is retained so it remains to be seen how (if at all) the CCL will apply to companies in the non-profit and charity sector. On the face of the CCL at least, no provision is made for them.

The CCL protects third parties dealing with an LLC by the introduction of a concept of ostensible authority, of sorts, in the sense that a company may not avoid liability on the grounds that its managing director was not properly appointed, provided that his or her actions are within the usual scope for a person in that position. An LLC also retains its separate corporate personality, and it remains advisable to specify in the LLC's MoA the profit split between partners – to the extent that this differs from the registered shareholding – given that in the absence of such stipulation, the default assumption will be an allocation of profits pro rata to the registered stakes.

The CCL chapter which governs LLCs envisages the establishment and registration of sole proprietorships as LLCs, and that an LLC may be incorporated and held by one natural or corporate person. It is not immediately apparent how this provision can be reconciled with the preceding CCL article (which states that an LLC still requires at least two, but no more than 50, partners), but it does at least suggest that there may be scope for the relaxation of the "minimum two shareholders" rule for onshore LLCs.

One particularly positive development is the clarification in the CCL that a partner may assign or pledge his shares in an LLC, either to another partner or to a third party. Security over shares in an LLC has long been an area of some confusion in the UAE and it is encouraging that the CCL now specifically addresses the taking of pledges over shares (by way of an "official document" and in accordance with the LLC's MoA), which shall need to be registered with the competent authority in order to be valid. There is little detail in the CCL on how this mechanism will work in practice, but it is nevertheless a welcome step in the right direction and an improvement on the Old Law.

The somewhat restrictive provision in the Old Law limiting the number of managers in an LLC to five individuals has been lifted, meaning that companies can lawfully have boards in excess of this number, even if they are not joint stock companies. This should bring a degree of flexibility for larger corporations and in particular joint ventures, in which it may be necessary or prudent to give key partners a "voice" at board level.

Further up the chain at shareholder level, the procedure for dealing with inquorate general meetings has been streamlined and simplified; under the CCL, an LLC general meeting must now comprise at least 75 per cent of the shareholders by capital to be quorate, failing which the reconvened general meeting (held within the following fortnight) must be attended by at least 50 per cent of the capital. If the quorum fails again at that reconvened meeting, the third and final attempt 30 days later is deemed valid, irrespective of who attends.

4.  Joint Liability Companies/Simple Commandite Companies

Joint Liability Companies and Simple Commandite Companies (formerly Sleeping Partnerships, under the Old Law) were previously business entity structures reserved for UAE nationals only. Under the CCL, such structures are now available to "natural persons", suggesting that there may in future be scope for non-Emirati individual traders to enter into business structures which were previously unavailable to them. Such structures are, however, unlikely to be of material interest to corporations. 

5.  Public Joint Stock Companies

A substantial section of the CCL is devoted to public joint stock companies and their governance, setting out requirements in much more detail than was previously provided. Regulatory oversight of PJSCs has largely been handed over from the Ministry of Economy to the Emirates Securities and Commodities Authority (ESCA). Other notable differences include an increase in the founder shareholders' proportion of issued capital, from between 20-45 per cent to the higher minimum of 30-70 per cent. Inflation since the mid-80s appears to have taken its toll on the requisite minimum issued share capital of a PJSC, now at a level of AED30m (under the Old Law, the minimum was AED10 m). Note also in this context that the CCL introduces a concept of authorised (but unissued) share capital, which may be up to double the share capital in issue. Another new entry in the CCL is the express capacity for PJSCs to introduce employee share schemes, participation in which may be encouraged by the PJSC board.

The number of directors permitted on the board has, in contrast to the position with LLCs, reduced slightly – from between three and 12 to between three and 11. The duties of directors remain much the same, however, with only minor drafting changes to the directors' duties previously contained in article 111 (and following) of the Old Law.

Should the shareholders of a PJSC deem the actions of the company to have prejudiced any or all of them unfairly, there is now scope for one or more such partner holding at least five per cent of the capital to apply to ESCA, and thereafter the relevant court, for an appropriate order. Furthermore, this nascent regime for board accountability is strengthened by the inclusion of a right for the company itself (acting through its shareholders) to file a claim against its board of directors, if its actions have caused harm to all shareholders. It will be interesting to observe whether these new provisions manifest themselves in a wave of unfair prejudice claims in the UAE. Probably not, would be our prediction.

6.  Private Joint Stock Companies

The Old Law only contained three short articles on the subject of private joint stock companies; the CCL, however, devotes a full few pages to this form of business entity and clarifies a number of procedural matters in the process. A new PrJSC may now be formed by shareholders numbering between two and two hundred (under the Old Law, at least three shareholders were required). As with PJSCs, the minimum share capital has increased, from AED2m to AED5m, fully paid up. 

7.  Special Company Structures

Towards the end of the CCL, there is brief mention of two other types of business entity – investment funds, and holding companies. 

The references to investment funds merely confirm the status quo that such vehicles shall be established pursuant to the separate rules and regulations of ESCA, unless they are otherwise licensed by the UAE Central Bank. The provisions on holding companies, however, hold much more interest from a corporate perspective because they envisage the establishment of an onshore vehicle which exists simply to hold shares in UAE joint stock companies or LLCs, provide loans guarantees or finance for, and generally manage, its subsidiaries. While holding companies are a familiar aspect of the landscape in many other developed jurisdictions, historically the concept of having an entity which simply sits at the top of a structure – potentially not conducting any tangible commercial activity itself – has seemed at odds with a legislative and licensing regime in the UAE which is predicated on a company, and particularly an LLC, conducting some form of business activity (be that commercial, professional or industrial). It is too soon to say what effect or impact this new business structure may have on how onshore UAE businesses arrange their group affairs, although it is certainly an interesting new option for UAE-based groups and one which we intend to explore further with the relevant UAE authorities.

8.  Conclusion

The new UAE Commercial Companies Law has been eagerly anticipated for the best part of a decade, and in that time it is evident that considerable thought has gone into strengthening shareholder protection, enhancing corporate governance and generally making investment in UAE companies easier. It is encouraging that so many aspects of international corporate best practice have found their way into the new legislation. 

Notwithstanding these clear advancements and improvements, however, there is a sense that the new law could, and perhaps even should, have gone further still in order to deliver on the UAE's aims of delivering a truly world-class legislative environment in which companies may prosper and thrive; and as highlighted in this briefing, there remain some wrinkles which will need to be ironed out in the fullness of time, not least through the promulgation of more detailed, secondary legislation in some key areas.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.