Treasury shares are a useful instrument in many jurisdictions, including the United Arab Emirates. They are basically shares owned by the company itself. Businesses use treasury shares in various situations, including:
- employee share option plans;
- protection against hostile takeovers;
- certain corporate finance operations; or
- allocation for future raising funds or repayment in the event of M&A.
This article describes some of the regulations applicable to treasury shares in the U.A.E.
Background
There is no single source of corporate law in the U.A.E. Companies on the mainland territory are governed by the Federal Decree-Law No. (32) of 2021 "On Commercial Companies". Each of the more than 40 free zones usually has its own internal regulations applicable to companies incorporated in those free zones. In addition, there are two financial free zones governed by common law: Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). These free zones are governed by common law, and each of them has its own extensive corporate regulations.
Regulations on the mainland and in various free zones in the U.A.E. have different rules related to treasury shares. Therefore, it is important to be aware of them if you want to issue treasury shares in your U.A.E. company.
Mainland territory of the U.A.E.
Federal Decree-Law No. (32) of 2021 "On Commercial Companies" permits treasury shares for limited purposes: to decrease the company's capital or to redeem the shares. Putting a charge on such shares is prohibited.
Treasury shares of mainland companies have no vote in shareholders' meetings and do not grant any rights in profit distribution.
DIFC
According to the Companies Law DIFC Law No. 5 of 2018 purchase of treasury shares of a private company must be approved by a special resolution of shareholders. That statute establishes certain requirements for purchasing treasury shares, including:
- providing shareholders with a copy of the relevant share purchase agreement;
- ensuring treasury shares are paid-up;
- notifying the DIFC Registrar of Companies and providing with the new share capital details.
Companies Law DIFC Law No. 5 of 2018 permits DIFC companies, subject to limitations and requirements, to hold, cancel, or sell treasury shares, as well as use them for employee share option plans and for granting bonus shares to shareholders.
Other limitations applicable to treasury shares in DIFC include:
- no voting rights;
- no dividend or other distribution can be made;
- rights in respect of treasury shares cannot be exercised;
- obligations in respect of treasury shares are unenforceable.
ADGM
According to Companies Regulations 2020, an ADGM company can purchase its own fully paid-up shares subject to detailed procedures, requirements, and limitations. In particular, there are limitations on what funds can be used for purchasing treasury shares. A shareholders' resolution is required to authorise the acquisition of treasury shares, as well as the relevant share purchase contract. Rights of such a company under the treasury shares purchase agreement cannot be assigned. The ADGM Registrar of Companies must be notified when a company purchases its own shares.
Treasury shares can be used in ADGM for employee share schemes. The company can also cancel or sell its treasury shares. At the same time, the company owning treasury shares is prohibited from using any rights arising from the shares, including voting rights. No dividend or other distributions are possible in respect of treasury shares.
DMCC
According to the DMCCA Company Regulations 2020 (version as of January 2022), a special resolution of shareholders is required for a company to buy its own shares. Such a special resolution should also approve the share purchase agreement to be used for acquiring treasury shares. A company can use only funds from the following sources to buy its own shares: paid up capital, share premium, realised or unrealised profits, or other reserves.
A company must not exercise any right in respect of treasury shares held by it. No dividend or other distributions are possible in respect of treasury shares. On the other hand, a company can use treasury shares for employee share options, sell or cancel such shares.
IFZA, Dubai Silicon Oasis
The Dubai Integrated Economic Zones Authority Implementing Regulations 2023 that apply to IFZA and Dubai Silicon Oasis prohibit purchasing treasury shares for Free Zone Companies (FZCO, an LLC equivalent). Treasury shares are only permitted for Public Limited Companies (PLC) incorporated in these free zones.
Meydan Free Zone
Meydan Free Zone Companies and Licensing Regulations 2022 do not mention treasury shares. The right of a company to purchase its own shares is also not specified in those regulations.
JAFZA
JAFZA Companies Implementing Regulations 2016 permit limited liability companies (FZCO and FZE) to own treasury shares subject to (1) approval of the JAFZA Registrar of Companies; and (2) a special resolution of shareholders of such a company. Limited liability companies can only pay for treasury shares with funds from the distributable profit of such a company. Limited liability companies can hold, transfer, or cancel their treasury shares.
Limited liability companies in JAFZA are prohibited from exercising any rights in respect of their treasury shares, including voting and dividend rights. The regulations allow using treasury shares for employee share schemes.
DWTC
DWTC Company Regulations only specify that companies may purchase their own shares by passing a special resolution.
Should you have any questions, please feel free to contact CHENINS via www.chenins.ae.
This article is based on laws and regulations existing on 12 July 2024. It is intended for general informational purposes only and does not constitute legal advice or create client relationships.
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.