Menu Search through site content What are you looking for?

UAE Companies Law amended: legislation now issued

  • Legal Development 02 December 2020 02 December 2020
  • Middle East

  • Corporate

The UAE government has taken bold steps in the last month to change some of the country’s most fundamental laws.

The Official Gazette was issued at the end of last week, with a publication date of 30 September 2020, containing a significant number of important legislative developments. This is a 'bumper edition' of the Official Gazette. In this short article, we shall summarise some of the highlights from the amendments to the Commercial Companies Law (the CCL) under Federal Decree Law No. 26 of 2020 (the Amendment Law). These changes are wide reaching and give rise to action points for all UAE companies, and for investors – in and outside the UAE – who are considering how to approach corporate structuring and transactions in the UAE.

Foreign ownership and UAE national participation

The requirement for 51% of the shares in a company incorporated 'onshore' in an Emirate of the UAE to be owned by UAE nationals (which has been the subject of other recent legislative developments) has been removed from Article 10 of the CCL. Foreign ownership restrictions have not, however, been abolished entirely. Instead, the government has moved to a new default position that all companies may be wholly owned by non-UAE nationals, unless a specific restriction is created.

In particular, companies carrying on activities with a “strategic impact” will continue to be subject to restrictions on foreign ownership. Article 5 of the Amendment Law states that no amendments may be made to the memorandum of association, or equivalent document, (MOA) of an existing company which prejudice UAE national ownership if the company carries on such “strategic impact” activities, without the consent of the competent licensing authority. A Cabinet Decision will be issued outlining the scope of these “strategic impact” activities and particular controls for the licensing of them. It will be interesting to see whether this list of “strategic impact” activities will correspond to the “negative list” under the (now repealed) FDI Law where 100% UAE ownership was mandated across 13 sectors (including banking, insurance, and commercial agencies), or whether it will be broader. Technology, sustainability, the environment, infrastructure and transportation, healthcare and education play a central role in UAE government strategy. With this new status quo, it is also possible that the government will look to the substance of UAE national involvement in companies operating in these sectors in which both UAE national and foreign investors hold shares.

Subject to any mandates of the Cabinet in relation to “strategic impact” activities, the power to issue decisions on the contribution of UAE nationals to the capital in companies has been devolved to the governments of individual Emirates. This was also the position under the (now repealed) FDI Law. It raises the question as to whether we will see policy differences between Emirates as to percentages of permitted ownership, and the level of capital contribution required for higher levels of foreign ownership.

Article 151 of the CCL has also been amended to remove the previous requirement that the chairman and the majority of the Board of Directors of a PJSC be UAE nationals, in favour of specific restrictions which will be the subject of future regulation.  

Another significant development is the removal of the requirement for a foreign company to appoint a UAE national "agent" in respect of a branch office registered 'onshore' in an Emirate of the UAE. The practical impact of this change is not yet clear, but it could present an opportunity for cost savings for foreign companies operating in the UAE through 'onshore' branch offices.

These new rules will come into force on 30 March 2021.

Other key changes

Creation of subsidiary regulations – one clear theme is that more legislation is expected. This ranges from corporate governance regulations for all companies, to detailed listed company regulations to be issued by the SCA (including covering topics such as related party transactions, convening PJSC meetings, recording meetings, and electronic share certificates).

Corporate governance – there is a reference to the fact that to-be issued governance regulations will apply to all companies, not just joint stock companies. This could bring welcome standards into the conduct and governance of LLCs.

Changes to meetings – there have been some amendments to the processes of convening and holding general meetings for LLCs and PJSCs. This includes an apparent roll back to a default 21-day notice period for meetings (which was reduced to 15 days when the CCL was introduced in 2015), and a reduction in the number of shareholders who may require a meeting to be convened to 10 per cent. The regime has been brought into the “new normal” by allowing meetings to be held by modern means of technology. For LLCs, the second reconvened general meeting requirement has been removed, if a quorum has not been met (so that there is only one reconvention at which there is no quorum requirement). This begs the question whether LLCs will need to amend their MOA if they reflected the previous provisions. This is relevant to the implementation period – see below. We will issue a more detailed briefing on the repercussions of these changes for our clients shortly.

Financial distress – there are new provisions which address companies in financial difficulty. For example, the LLC pre-emption rights on new issues of shares may be overridden by the court (on application by any partner), if new capital is needed to prevent dissolution. There is also more detail on the process to be followed by a PJSC where it sustains a loss of half or more of its issued capital, including a clear recommendation from the board and preparation of a restructuring or liquidation plan within the documents to be considered by the general meeting.

Extension of PJSC director liability– there is a clear move to extend liability to certain key managers who may not be directors. These include the CEO, the General Manager, and the Executive Manager. Directors and key managers found guilty of breaching their duties will be removed from office and disqualified for at least three years. There are also new provisions which seek to protect shareholders bringing claims against the directors and executives for loss arising from a breach of their duties or law such that they can recover their legal costs and fees in commencing proceedings (provided that the action was not malicious and the claim for costs and fees is supported by evidence).

PJSC regulation – the bulk of the amendments affect PJSCs. These include:

  • Article 121, which has been amended to clarify that it is the founders' committee and the board of directors (if any) who are liable for the prospectus, while advisers and other parties involved in the IPO process must perform their respective duties "with the care of a diligent person" .
  • New disclosure requirements for related party transactions, and provisions relating to proceedings against related parties for breach.
  • The UAE "Takeover Code" has been given more teeth under the CCL, including specific reference to a squeeze out of the minority, and new powers for the SCA to deal with breaches including warnings and suspensions. Although these are already within the Code (issued under SCA Resolution No. (18/RM) of 2017, regarding the Rules of Merger and Acquisition for Public Shareholding Companies), it is an important step to enshrine this into the primary legislation.
  • The prohibition on financial assistance has been expanded to include the use of reserves, funds or profits to provide such assistance. New exceptions have been introduced in relation to security, undertakings or compensation paid to underwriters, and for ordinary course loans made by licensed banks.  However, the government stopped short of introducing other exceptions to the prohibition.
  • The government has also introduced reforms related to capital increases – appearing to abolish authorised share capital (references to it have been entirely removed) and allowing a shareholder approval for issued share capital increases to last for up to three years.
  • Derivative action – a new provision has been inserted which allows one or more shareholders to commence proceedings on behalf of and in the name of a PJSC against a related party, in the event that the board of directors fails to act. This is in addition to the current rights to ask for a resolution to be suspended if it is to the detriment of shareholders, and under Article 164 to request the SCA to act if shareholders believe that the affairs of the company have been conducted to the detriment of any or all of the shareholders. The notable difference between this new right and the existing one is that the action is in respect of loss suffered by the company, not its shareholders.
  • Auditor appointment – auditors may be appointed for a maximum of a six year term (increased from three years), but there is a requirement to change the lead audit partner after three years. The same audit firm may be re-appointed after two years have expired from the date of their last term. This will be welcomed by the audit community and ensures stability in the preparation of financial accounts.
  • Listing rules – the amount of shares which may be sold by the founders in a listing has been increased from 30% to 70%, which will mean that family businesses will have a greater opportunity to exit from their businesses. There is, however, a statutory lock-up period of six months for the founders. There is also a new reference to listing by the issuance of new capital.

Entry into force and compliance

Existing companies are required to “adjust their positions” by 2 January 2022 – one year after the entry into force of the Law on 2 January 2021. There is a provision for a daily default fine of AED100 for failure to comply. On the implementation of the CCL, the lack of action by LLCs to amend their MOAs led to the government legislating to deem the provisions of the new law into existing companies’ constitutional documents. There is no provision for this, in relation to these amendments. The extent to which LLCs will be required to amend their MOAs if they complied with the previous provisions of the law – for example, quorum and notice requirements – to avoid a fine is not clear. We recommend that companies review their MOAs in good time to be prepared for any amendments or restatements to those documents that may be required.


Stay up to date with Clyde & Co

Sign up to receive email updates straight to your inbox!

Related Insights