UAE Updates Economic Substance Regulations
Changes made to the foreign ownership regime in the UAE have grabbed headlines in recent days. However, the Decree Law which ushered in these changes has made a wide range of other amendments to the Commercial Companies Law. In this briefing, we take a deep dive into the impact of these on Limited Liability Companies.
Decree Law No. 26 of 2020 (the Decree Law) has been published in the Official Gazette. It contains significant amendments to the UAE Commercial Companies Law (the CCL), five years on from the introduction of that Law to modernise the UAE’s company law regime.
The Decree Law makes changes to 51 provisions of the CCL, and introduces three additional provisions - almost 40 of which are aimed at joint stock companies. You can read a summary of all major changes to the CCL in another of our briefings here.
However, Limited Liability Companies (LLCs) are impacted by the amendments. In this briefing, we highlight the issues managers and shareholders of UAE LLCs need to be aware of, and key action points.
The press headlines of recent days have focused on the abolition of the foreign ownership restrictions - the requirement under Article 10 of the CCL for a UAE company to have at least 51% of its capital owned by a UAE national or a company wholly owned by UAE nationals.
The Decree Law rewrites Article 10 of the CCL. In effect, the requirement in relation to UAE national shareholdings has been reversed. It is currently not permitted to have majority or wholly foreign owned entities unless an express special exemption applies. These special exemptions are contained in the Foreign Direct Investment Law - Federal Law No. 19 of 2018 (the FDI Law) - which allows up to 100% foreign ownership in certain sectors against higher capital requirements. Now, instead, the Decree Law has permitted wholly foreign owned companies unless a special exemption applies to restrict them.
The new Article 10 creates two avenues for restrictions on foreign ownership in the future:
We will not know the full extent to which foreign ownership restrictions will continue to affect UAE businesses until this additional legislation is published. It may, therefore, be some time before companies will have certainty about the options available to them. Under the Decree Law, the FDI Law will be repealed with effect from 2 January 2021. The new provisions on foreign ownership do not come into effect until six months after the publication date of the Decree Law on 30 September 2020.
In effect, the requirement in relation to UAE national shareholdings has been reversed. It is currently not permitted to have majority or wholly foreign-owned entities unless an express special exemption applies.
In the meantime, companies should review the terms of any nominee arrangements in place, including due dates for payments under them and whether there are any provisions which facilitate or restrict termination of those arrangements or a transfer of the shares.
On a termination of nominee arrangements, the company would remain an LLC, however its name would require a suffix to denote that it is single shareholder company. A “conversion” requires a new Memorandum of Association (MOA) in a form appropriate for a sole shareholder.
In addition to a new MOA on the termination of nominee arrangements, other amendments in the Decree Law may force LLCs to amend their constitution. These include:
Dispute resolution clause - A new provision mandates that the MOA contains methods of dispute resolution between the company and its managers, as well as between the shareholders (Article 73(2)). Traditionally, the MOA is viewed as an agreement for the incorporation of a company, regulating the relationship between the shareholders of that business. However, this new Article suggests that it is intended to be a contract which deals with the relationship between the company and its manager(s) as well. If this is so, the manager(s) and the company may need to be parties to that agreement for it to bind them. Few MOAs currently provide for this. This would potentially entail a new MOA each time the manager is replaced, and the manager being required to sign each time amendments are made to the MOA by the shareholders. The nature of the manager’s role as an employee may also be important to consider in this context, including the effect on Labour Law rights such as disciplinary processes and termination protections, and the specific terms of the manager’s service contract. It will take time to understand how this provision will be interpreted and implemented in practice.
Changes to convening General Meetings - The Decree Law has increased the notice period for General Meetings to at least 21 days, up from 15 days. This reverts back to the pre-2015 CCL position. In addition:
For LLCs which had written the provisions of the current CCL into their MOA, it is not clear if the amended provisions will be deemed to be incorporated such that they will need to restate their MOA after 2 January 2021 if they want to keep the higher thresholds. This will be an important point for companies which are the subject of joint venture arrangements, for example.
Modern means of sending notices and holding meetings - Under Article 93, LLCs may provide for “modern technological means” by which notices may be sent to shareholders by a specific provision in their MOA. This may include email and instant messaging for example. The CCL also now allows meetings to be held by modern technological means which enable remote attendance (such as video conferencing).
Article 104 of the CCL carries relevant public joint stock company (PJSC) provisions across to LLCs. Clarity as to which of the provisions apply in this way is currently provided by Ministerial Resolution No. 272 of 2016 (Resolution 272). In the changes brought in by the Decree Law, a new Article 104(2) states that a Cabinet Resolution will be passed to provide this clarity from now on. Therefore, Resolution 272 will no longer have force of law, at least in respect of provisions which contradict the Decree Law, after 2 January 2021.
However, based on the approach taken in Resolution 272, the following changes made to PJSC provisions are likely to affect LLCs:
These include a minority shareholder protection provision in Article 92, allowing shareholders holding 10% or more of the capital in the company to request a General Meeting. Resolution 272 contains a similar right for shareholders, for those holding 20% or more of the capital (and holders of 10% or more have a right to ask the DED to call for a General Meeting if an emergency arises to pass an extraordinary resolution). As noted above, this represents an effective repeal of Resolution 272 from 2 January 2021 in this regard.
The Decree Law comes into force on 2 January 2021, except for the foreign ownership changes which will take effect after six months from the publication date of 30 September 2020.
Under Article 4 of the Decree Law, companies are required to “adjust their positions” within one year of the effective date of 2 January 2021 (subject to that period being extended by Cabinet Resolution). A failure to do so will result in the company being deemed to be dissolved. This provision was contained in the original CCL in 2015, however, in practice, 18 months after its introduction, the Ministry of Economy issued Resolution No. 694 of 2016 to state that existing companies were considered to have adjusted their position to the extent that they complied with the new Law, without needing to take positive steps to amend their constitutions. It remains to be seen if the government will take the same course of action this time. It is important to note in this context that there is a daily default fine of AED100 for failure to adjust positions, although this is a reduction against AED2000 per day under the current provisions.
We strongly recommend that LLCs review their MOAs to bring them up to date with the amended CCL - both to ensure that the new notice and quorum requirements do not present issues, but also to take advantage of the relaxations relating to the use of modern technology.
If you have any questions concerning the new Commercial Companies Law or its potential impact on your business, please contact the authors or your usual Clyde & Co contact.
Key take-aways from the Decree Law