Landmark Reforms Announced in the UAE Companies Law
Over the last few years, the UAE has embarked upon a concerted drive to establish itself as a globalized center which attracts a wide array of talent from a diverse assembly of nationalities and cultures. To execute this vision, there have been a flurry of socio-economic legislations which attempt to create a cultural and economic environment more relatable to the 8 million expatriates, who call the UAE their home.
However, it is this year, a year characterized by a pandemic wreaking havoc on most countries and paralyzing their political and administrative systems, in which the UAE has introduced perhaps the most impactful set of laws and regulations. The advent of the Foreign – Direct Investment Laws and Regulations (“FDI Laws”) earlier this year and the changes made to the personal and family laws earlier this month, promise to evolute the landscape of socio-economic lives of residents in the UAE.
The FDI Laws allowed foreign nationals to hold up to a 100% share in companies incorporated in the Mainland UAE. This allowance however, was only made available to a list of 122 activities known as the ‘Positive List’ while a list of 8 activities were included in the ‘Negative List’. There are several other conditions for a proposed FDI Company to adhere to, such as high minimum capital and technical requirements. While the FDI Laws were a step in the right direction, the stringent conditions attached to it left the expat community pondering as to whether it would translate into a practical option.
However, on 23/11/2020, President His Highness Sheikh Khalifa bin Zayed Al Nahyan issued a Presidential Decree (“Decree”) which not only superseded the FDI Law but broadened its concept as well as made key changes to the current provisions of the UAE Federal Law No. 02 of 2015 concerning Commercial Companies (“UAE Companies Law”). While the Decree is not available in the public domain yet, the following are the amendments which the Decree lays out, as reported by the Emirates News Agency (“WAM”):
100% Foreign Ownership in Companies
According to WAM, “The decree, which introduces significant amendments to the UAE Federal Law No. 2 of 2015 on Commercial Companies, annuls the requirement for commercial companies to have a major Emirati shareholder or agent, providing full foreign ownership of onshore companies.”
Currently, Article 10(1) of the UAE Companies Law stipulates a minimum ownership of 51% shares in all companies to be held by UAE Nationals, with the exception of Joint Liability Companies (Partnership Companies) and Single Commandite Companies (Sole Proprietorships), which are exclusively reserved for UAE Nationals.
Therefore, the amendment introduced by the Decree should amend the provision of Article 10(1), as it currently stands. While it is unclear as to whether the term ‘commercial companies’ as used in the WAM Report includes Partnerships and Sole Proprietorships, the understanding of the term in nomenclature would suggest it does.
However, it is expected that certain sectors such as Oil & Gas, Real Estate etc. would still contain restrictions on foreign ownership, with WAM stating that, “The decree authorizes the cabinet to set up a committee that includes representatives of the relevant authorities [presumably, the Department of Economic Development of each Emirate] with a view to proposing activities of “strategic impact” and the measures required to licence companies that operate in such areas. Upon the recommendation of the committee, the Cabinet will stipulate what activities shall be considered of strategic impact and the required measures for licensing such companies.”
The WAM Report goes on to state that, “Under the new amendments, businesses can now be fully established by non-Emiratis of all nationalities, with companies now having a maximum of one year to comply with the amended law from the time its articles become effective. This can be extended under a decision by the cabinet as proposed by the Minister of Economy.”
It is again unclear as to what compliance is being required from companies. Whether or not the Decree may allow existing companies being majorly held by non-active UAE National to apply for a unilateral conversion of the company to one wholly owned by the expat or for a reduction in the UAE National’s shareholding would be known only when the Decree is published in the official gazette. If such is the case, the Decree, its implementing regulations or the amended UAE Companies Law would be expected to include the procedure for the same, as well as a standardized mechanism for evaluating the shares held by the UAE National.
While the most notable amendment introduced by the Decree is undoubtedly the introduction of 100% ownership of companies by expatriates, the Decree has introduced several other amendments which are designed to enhance the system of corporate governance in the UAE.
a) Appointment of Non-shareholding Directors:
The amendments provide for the appointment of directors who are not shareholders of the company but have relevant expertise in the field the company operates in. This may be similar to the Independent Directorship regime which is found in some jurisdictions, most notably, USA and India;
b) Legal Remedies Available to Shareholders:
The amendments allow for shareholders to sue the company for any ‘failure of duty that results in damages’. The UAE Companies Law currently contains several protections for shareholders including the right to sue the General manager for gross negligence/misuse of funds, or a right against the Board of Directors, provided a General Assembly Resolution is passed.
However, these protections often accompany arduous procedures which are not always practical for shareholders, especially minority shareholders, to fulfil. Further, there are often instances where minority shareholders or inactive shareholders are dragged into legal proceedings arising out of the actions of the management of the Company when the UAE Courts proceed to pierce the corporate veil.
It is hoped that the further amendments and additions to the UAE Companies Law in this context can create a holistic system of remedies where innocent shareholders who have been wronged by the actions of the management of the company, are better empowered to protect their interests.
c) The Securities and Commodities Authority will be empowered to formulate controls and procedures on share evaluation and appointment of board members in Joint Stock Companies.
The Decree is also expected to contain several other amendments which enhance the corporate governance profile of companies. Some of the biggest companies and groups in the UAE have been brought to its knees due to mismanagement and corruption by senior officials of these companies, and the Decree is a step in the right direction in ensuring that investor confidence in the UAE recovers.
While the Decree is reported to have introduced 51 amendments to the UAE Companies Law, some of the other amendments reported to have been introduced are:
a) Electronic voting at general assembly meetings will now be allowed. While this is already a widespread practice, especially during a pandemic, there was always a risk of frivolous claims being raised against the validity of a general resolution if the same had not been passed in a physical meeting of the shareholders;
b) Companies wishing to go public can offer up to 70 percent of their shares through IPOs , a marked increase form the erstwhile limit of 30 percent.
Impact on Free Zones
The erstwhile restrictions on foreign ownership led to a multitude of expats opting for Free Zones as a choice jurisdiction to establish their business in. It would therefore be interesting to observe the impact of the recent changes in the UAE Companies Law on the popularity and utility of the Free Zones.
Many of the Free Zones, such as the Dubai International Financial Centre, Abu Dhabi Global Markets, JAFZA, DMCC etc. provide a very specific ecosystem and network for companies dealing in highly specialized fields such as financial trading, import-export etc. Therefore, these Free Zones are likely to remain largely unaffected.
However, many of the smaller Free Zones, which only operate as a means to allow expats to own 100% of their companies, may experience a significant downturn in their popularity as expats would prefer to shift or incorporate in the Mainland UAE. This should, at least in theory, create a pressure upon all Free Zones to increase their competitiveness by introducing more flexibility, innovative incentives etc.
Bestwins shall be monitoring further developments regarding this welcome move from the side of the UAE Federal Government as and when they become available, and shall promptly notify when the entire contents of the amendments are released in the public domain.
Disclaimer: The above article and opinions expressed on it are based upon the limited information currently available in the public domain and may be subject to further changes. The full WAM Report may be accessed at https://www.wam.ae/en/details/1395302889305.