The issue of the new commercial companies law (Federal Law No. 2 of 2015) (the Law) was announced by the UAE government on April 1, 2015, and will come into effect three months after the date of publication in the Official Gazette. Here we summarise how the Law will affect some of the structures used by foreign investors to establish businesses in the UAE.
Foreign ownership restrictions
For now, the position in relation to the percentage capital which must be held by a UAE national, or a company wholly owned by UAE nationals, remains unchanged from the previous commercial companies law (Federal Law No. 8 of 1984) (the 1984 Law). One or more UAE nationals must hold at least 51 percent of the share capital of any UAE company where the company is partly owned by non-GCC nationals. There is no express provision which empowers the cabinet to relax the ownership restrictions. The Minister of Economy has made clear that foreign ownership will instead be covered in a new foreign investment law, which may allow wholly foreign owned companies in certain sectors of the economy.
Foreign companies wishing to do business in the UAE without incorporating a new corporate entity must still appoint a UAE national agent in order to establish a branch.
LLCs are a common vehicle for foreign investors looking to establish a separate legal entity with limited liability. Generally, an LLC offers the most flexibility for structuring management and shareholder control (subject to the foreign ownership restrictions).
The following changes may affect the structuring of LLCs used for foreign investment:
- No cap on directors – the 1984 Law allowed a maximum of five directors. Under the new law, the maximum has been removed. The removal of the cap enables more flexibility in structuring the management of the LLC.
- Share pledges – under the 1984 Law, it was unclear whether a shareholder could pledge its shares in an LLC as security. The Law expressly permits this. Any such pledge must be registered in the commercial register. However, there are a number of areas in relation to pledges which will need to be clarified in practice. In particular, the interaction between the pledge provisions and the foreign ownership rules and the way in which a pledge may be perfected regarding other creditors of the shareholder is not clear.
- Increase in shareholders – it is now possible for LLCs to have up to 75 shareholders. This is an increase from 50 shareholders in the 1984 Law. In practice, this is unlikely to have a significant effect on most LLCs. It is unusual for an LLC to have a large number of shareholders because all share transfers are subject to pre-emption rights and any change in the memorandum requires all shareholders to attend the public notary to approve the change.
- Shareholders meetings – there have been a number of changes made to the way in which LLC shareholder meetings may be conducted, including shorter notice periods (15 days instead of 21), the ability for shareholders to appoint third party proxies and changes to the rules on quorum.
- Holding companies – the new law allows for LLCs (and joint stock companies) to be established as holding companies. This adds helpful structuring flexibility, although the practical requirements, such as the commercial premises requirements, are yet to be clarified.
We recommend that all companies reconsider their memorandum of association and shareholder arrangements to ensure that they get the best from the new UAE company law regime.