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16 Dec 2020

UAE amends the Commercial Companies Law: Changes to foreign direct investment and limited liability companies in the UAE

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As a follow-up to our previous article concerning the proposed changes to Federal Law No. 2/2015 on Commercial Companies (the "CCL"), the UAE has issued Federal Decree-Law No. 26/2020 (the "Federal Decree-Law") setting out the much anticipated amendments to the CCL.

While this Federal Decree-Law introduces a number of important amendments affecting LLCs and joint stock companies, in this article we focus on some of the key amendments that will likely have an impact on foreign direct investment in the UAE as well as some amendments affecting the governance of LLCs since they tend to be the most common corporate structure used by foreign investors.

In recent years, the UAE has taken steps to ease foreign ownership restrictions applicable to onshore UAE companies and pass laws and regulations that are intended to incentivise foreign investment in the country. The amendments introduced by the Federal Decree-Law appear to be in line with the UAE's intention of making the country an even more attractive destination for foreign investment. Although several questions remain with respect to the short-term practical implications concerning these amendments; in the long run, the changes introduced by the Federal Decree-Law will likely have a positive impact on the UAE economy and significantly increase the level of investment and M&A activity.

Foreign ownership and the FDI regime prior to the Federal Decree-Law

Prior to the issuance of the Federal Decree-Law, Article 10 of the CCL required a company established in the UAE to have one or more Emirati partners (or a company wholly owned by Emirati nationals) holding at least 51% of the company's capital. This provision effectively capped the level of foreign ownership in any onshore LLC or joint stock company at 49%.

However, to increase the amount of foreign investment in the country, the UAE issued Federal Decree-Law No. 19/2018 regarding Foreign Direct Investment (the "FDI Law") as well as Cabinet Decision No. 16/2020, (together with the FDI Law, the "FDI regime"), which effectively created an exception to the general rule set forth in the CCL. Essentially, the FDI regime allowed for foreign investors to own up to 100% of onshore companies doing business in any of the economic sectors and activities approved by the UAE Cabinet pursuant to its "Positive List". On the other hand, the FDI Law also included a "Negative List", which is a list of economic sectors and activities that require at least some level of Emirati ownership.

What has changed?

The Federal Decree-Law has amended Article 10 of the CCL, and in principle changed the default requirement imposing at least 51% Emirati ownership in an LLC or joint stock company. Rather, LLCs and joint stock companies may be wholly owned by foreign nationals unless they are engaged in an activity that has a "strategic impact".

The amended Article 10 now provides for a committee to be created that will determine those activities that have a "strategic impact" and the controls necessary for licensing companies to do business in these activities. In turn, the UAE Cabinet will issue a decision setting out these activities and the relevant licensing controls based on this committee's proposals. Subject to the UAE Cabinet's decision, the competent authorities of each Emirate will determine the specific percentage of Emirati participation in the capital and/or the board of the companies to be incorporated in their jurisdictions. Further, the amended Article 10 also states that the UAE Cabinet may exempt any company whose activities are regulated by special legislation from any activity or provision relating to an Emirati's shareholder percentage or contribution in the management of a company.

In addition to amending Article 10 of the CCL, the new Federal Decree-Law also repeals the existing FDI Law and by inference Cabinet Decision No. 16/2020, as well.

What does this mean?

In the short-term, the implications of the changes to foreign ownership will remain unclear until the amendments made to Article 10 of the CCL take effect, which will be six months from the date of the Federal Decree-Law's publication in the Official Gazette. In the interim, the current foreign ownership restriction pursuant to Article 10 remains applicable while the FDI Law has been repealed.

Further, the Federal Decree-Law also provides that no amendments may be made to the memorandum of association or articles of association of any company in existence at the time this Federal Decree-Law comes into force that is in a manner prejudicing an Emirati's contribution to the company or its boards of directors if such company exercises any activity with "strategic impact" (without the consent of the relevant competent authority). In addition, we will need to see the decisions and guidance issued by each Emirate concerning the specific percentage of Emirati participation in the capital and/or the boards of those companies engaged in such activities.

Thus, it is unlikely that any of the Emirates' Department of Economic Development will take any action that may affect the ownership of any company until further decisions and guidance are issued. In the meantime, we will need to wait and see the UAE government's strategy with respect to Emirati national involvement in various industries and sectors and whether the UAE Cabinet's decision will take into account the repealed FDI Law's "Negative List" in defining those activities having a "strategic impact". In any event, unless the "strategic impact" sectors are known, the non-"strategic" sectors cannot be determined.

Governance of LLCs and the provisions of the CCL applicable to joint stock companies

Prior to the Federal Decree-Law, Article 104 of the CCL stated that the provisions of the CCL applicable to joint stock companies also applies to LLCs unless otherwise provided by the CCL.  In 2016, the Minister of Economy issued some clarification pursuant to Ministerial Decision No. 272/2016 on the Implementation of Some Provisions of the Public Joint Stock Companies to Limited Liability Companies (the "2016 Ministerial Decision"), which among other things, set out the public joint stock company provisions that specifically pertain to LLCs and those that do not, and it also included provisions related to the governance of LLCs.

The Federal Decree-Law amends Article 104 of the CCL so that in the absence of any special provision in the CCL, LLCs will be subject to the articles applicable to joint stock companies to the extent that such provisions suit the nature of LLCs. In addition, the UAE Cabinet will issue a decision, based on the Minister of Economy's proposal, that will contain the provisions to be applied to LLCs in the cases where the provisions applicable to joint stock companies do not suit the nature of LLCs.

While Article 104 is helpful in aligning the corporate governance provisions of joint stock companies and LLCs, it is not clear at this time whether we may expect to see a new decision to be issued by the UAE Cabinet that will replace the 2016 Ministerial Decision or if this amended provision is intended to give a legislative basis to the 2016 Ministerial Decision. Thus, again we will have to take a wait and see approach with respect to this amendment.

Other amendments affecting the governance of LLCs

In addition to the amendment described above, the Federal Decree-Law also provides for the following amendments to the CCL affecting the governance of LLCs:

  • Article 73 – This provision now also includes a requirement for an LLC's memorandum of association to include a method for settling disputes that arise between the company and any of its managers/directors or that arise among the shareholders as a result of the company’s businesses.
  • Article 92 – The amendment to this Article states a general assembly meeting will be called by the manager/director of an LLC upon the request of shareholders owning at least 10% of the share capital of the company (instead of 25% as was previously required).
  • Article 93 – Invitations to a general assembly meeting must be sent at least 21 days prior to the scheduled date of the meeting (instead of 15 days as was previously required). They must be addressed in accordance with guidelines issued by the Minister of Economy and include certain information as required by Article 93.

    The shareholders of an LLC must be notified in writing or in accordance with modern technological methods as  set out in the LLC's memorandum of association and the invitation together with the documents related to the general assembly meeting to be held must be notified to the relevant authority prior to sending the invitation. General assembly meetings may be conducted remotely in accordance with regulations set out by the Minister of Economy.
  • Article 96 – This Article now provides that unless the LLC's memorandum of association states otherwise, a quorum of general assembly meeting requires the presence of shareholders owning at least 50% of the share capital of the company rather than 75%. If quorum is not present, the meeting must be reconvened to another date that is at least five days but no more than 15 days following the date of the first meeting. There will be no quorum requirement for this adjourned meeting unless the memorandum of association provides for a higher majority to be present at that meeting. Thus, there is no longer a requirement to hold an additional reconvened general assembly meeting if quorum at the first adjourned general meeting is not met.
  • Article 101 - The amendment introduces a mechanism for any shareholder to obtain a court order to increase the share capital of the company to the extent necessary to avoid liquidation of the company or for the company to pay its debt.

Branches and representative offices of foreign companies

Prior to the Federal Decree-Law, a branch or representative office of a foreign company was required to have an Emirati national (or a company wholly owned by Emirati nationals) as its agent pursuant Article 329 of the CCL. The Federal Decree-Law has repealed Article 329 of the CCL.

When do these amendments take effect?

The amendments set out in the Federal Decree-Law are to come into force as of 2 January 2021, except for the amendments to Article 10, as well as  Article 329 (and Article 151, which is an amendment not covered under this article and concerns the nationality of directors of public joint stock companies), which will take effect six months from the date of the Federal Decree-Law's publication in the Official Gazette.

Next steps

The Federal Decree-Law provides that companies have one year from the date that it comes into force to "adjust their positions", which may be extended upon the proposal of the Minister of Economy. If a company fails to adjust its position within this period, then notwithstanding any other sanctions pursuant to the CCL, it will be considered to be dissolved. The Federal Decree-Law also provides that a fine of AED 100 per day will be imposed on any company that fails to adjust its position in accordance with the amended CCL and its implementing resolutions.

Thus, we recommend that companies use this time to review their memorandum of association in case amendments are necessary to comply with the amended provisions of the CCL. With respect to the changes affecting foreign ownership, we will continue to monitor any new developments and update you accordingly.

Finally, for any company that is not engaged in an activity that will likely be considered as having a "strategic impact", should the minority shareholder(s) want to take advantage of the new foreign ownership regime when it takes effect and hold greater than 49% of the company's capital, it should begin reviewing its constitutional documents and agreements and be prepared to negotiate such transfer with the local partner(s).

Questions

If you have any questions or concerns regarding the amendments introduced by the Federal Decree-Law or their practical implications or you have a question with respect to structuring your business in the UAE going forward, please do not hesitate to contact any of the team members listed below or your usual contact at the firm.

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KEY CONTACT

Diwakar Agarwal

Diwakar Agarwal
Partner

T:  +971 4407 3905 M:  +971 52 120 3149 Email Diwakar | Vcard Office:  Dubai

Sean Angle

Sean Angle
Partner

T:  +971 4 407 3902 M:  +971 55 224 4061 Email Sean | Vcard Office:  Dubai

Sandeep Dhama

Sandeep Dhama
Partner

T:  +971 4 407 3906 M:  +971 55 552 0869 Email Sandeep | Vcard Office:  Dubai

Toufic Safie

Toufic Safie
Senior associate

T:  +971 4 407 3926 M:  +971 56 296 0760 Email Toufic | Vcard Office:  Dubai