General View on Key Changes of the New Commercial Companies Law of 2015
By Sonam Trehan, Associate, United Advocates
Federal Law No. 2 of 2015 concerning Commercial Companies (“New CCL”) came into force on the 1st of July 2015.
This article aims to summarise the key changes to the existing commercial companies law and highlight the improvements made to the framework of the old CCL, in an effort to modernise the governance of companies in the UAE.
Application of the New CCL
The New CCL applies to all companies incorporated on shore in the UAE. Free Zone companies are not subject to the New CCL unless they are permitted to operate on shore (article 5). Companies which are exempt from the New CCL are those excluded by resolution of the Federal Cabinet, those wholly owned by Federal or local government and companies operating in certain oil, gas or power sectors which the Federal or local government directly or indirectly holds 25 per cent (article 4).
Key updates regarding activities of companies
Restrictions on foreign ownership: The law has maintained the mandatory requirement of national ownership of not less than 51 per cent of any company that is established onshore in the UAE. The law has added that any transfer of shares that would have an impact on the mandatory national ownership would be deemed null and void (article 10).
Accounting requirements: Companies are required to keep accounting records at their relevant head offices for a minimum period of five years (article 26). Companies should apply international accounting standards and practices.
Update Company Documents: All companies are required to amend their existing memoranda and articles of association to comply with the changes introduced by the New CCL.
Manager's and Director's duties: Directors and managers must act in the benefits of the company, voiding any provision in the company's memorandum and articles of association exempting a director/manager from personal liability (articles 22 and 24).
Corporate Social responsibility: This is now an explicit provision stating that companies should be aware and engage in social responsibility (article 375).
The Companies' Registrar
The concept of a Companies' Registrar, widely known in common law jurisdictions has been introduced. The Registrar shall supervise the trade name register (to avoid double registration), hold company records and enable concerned parties to inspect the relevant company records (articles 33-38). The law does not allow the general public to inspect and view companies' records, this right is limited to related parties only.
Introduction of Holding Companies
The concept of a holding company has been introduced. A holding company can take form of either a joint stock company or an LLC, but can only conduct business through its subsidiaries. The holding company is able to hold shares in companies, extend finance and acquire assets and intellectual property (articles 266 and 267).
Key changes for Limited Liability Companies
Shareholders: The number of shareholders now required to form a LLC is 1 to 75. The concept of a LLC incorporated by a sole shareholder is new. In practise this will only benefit UAE national entrepreneurs. For foreign investors a UAE shareholder must still own 51 per cent of the shares of a LLC.
Share Pledges: The New CCL provides for the creation of share pledges over shares in a LLC and this is likely to play an important role in the financing of LLCs.
Minimum capital requirement: The minimum capital for LLC’s has been removed. Instead the Law requires that a LLC should have capital sufficient to achieve its goals, but immediately after the Law mentions that the Cabinet may issue a resolution setting the minimum capital off a LLC!
Management of a LLC: There is now no requirement that there should be a maximum of five directors or managers. One or more managers can manage a company or directors as determined by the company’s memorandum and articles of association or the general assembly of the company (article 83).
Key updates for Private Joint Stock Companies (PrJSC) and Public Joint Stock Companies (PJSC)
In regard to a PrJSC, the minimum share capital has increased to AED 5 million and the minimum share capital for a PJSC is now AED 30 million. The concept of a ‘share register secretariat’ has been introduced, this is defined as an entity licensed by the Securities and Commodities Authority (SCA) to keep register of PrJSC's. Share transfers are only to be valid from the date of their registration with the share register secretariat (Article 260). The lockup period for any transfer of shares following incorporation is one financial year rather than two financial years as it was under the old CCL (Article 264).
PJSC's are to be regulated by the Securities and Commodities Authority. In an effort to encourage UAE businesses to list their shares on the local stock exchanges the New CCL allows founder shareholders' to hold up to 70per cent of its shares prior to any public offering of shares, hence, enabling founders to retain control of their business even after an IPO. PJSCs can now introduce employee share schemes, participation in which may be encouraged by the PJSC board.
Initially the deadline to comply with the New CCL was 30 June 2016, however recently the government has provided a one-year grace period ending in 30 June 2017. Failure to amend constitutional documents can lead to the dissolution of the company, directors and auditors found in breach may be removed from their office and personal liability and significant fines may be levied on the officers in breach of the New CCL.
If you require future assistance on the matter, please do not hesitate to contact us at United Advocates.