July 1, 2015

The impact of the new UAE Companies Law on existing LLCs

The new UAE Commercial Companies Law (Law No. 2 of 2015) (the New Law) came into force on 1 July 2015. The managers/directors of any Limited Liability Company (LLC) that is incorporated "onshore" in the UAE should start to consider what changes may need to be made to the LLC's Agreement for Incorporation/Memorandum of Association (Memorandum) to bring it in line with the New Law. LLCs may also want to take advantage of a number of deregulatory changes in the New Law.

Managers/directors are well advised to think about the changes which may need to be made, not only to the existing Memorandum, but also to the way in which they conduct their corporate affairs from today.

The grace period

Article 374 of the New Law allows existing companies a 12 month grace period in which they must "adjust their positions".  This is taken to mean that an LLC will need to amend any conflicting provisions in its current Memorandum by 30 June 2016, unless that deadline is extended.

However, it is important to note that this grace period does not mean that LLCs do not need to comply with the New Law for a year.  Where a new corporate action is to be taken which is not the subject matter of the LLC's existing Memorandum, that action must be taken in compliance with the New Law.  Therefore, from 1 July 2015, LLCs will need to implement important amendments, in practice, such as taking account of the new codified standards for directors and the new requirement to prepare audited accounts in accordance with International Accounting Standards.

Potential amendments to a Memorandum

There are two types of amendment which may be made to a Memorandum to reflect the New Law: changes which are mandatory under the New Law, and amendments which are desirable to make the operation of an LLC more efficient.  We highlight a few of these below.

Necessary changes

  • Addresses: Under the New Law, the Memorandum should set out the address of the LLC's head office and of any branch offices it has registered.  Any additional branch offices that are registered and any change in the existing head office or branch office addresses will need to be reflected in an amendment to the Memorandum going forward, as an additional administrative requirement;
  • Pledges: The New Law envisages that the Memorandum will include information on the manner in which a share pledge may be created;
  • Manager dismissal: The New Law changes the way in which the manager of an LLC may be dismissed.  Under the New Law, if the Memorandum is silent, the manager may be dismissed by an ordinary resolution at a general meeting.  However, the LLC may specify its own requirements for dismissal in the Memorandum.  This contrasts with the position under the 1984 Commercial Companies Law which provided that, if the Memorandum of Association was silent on the manager dismissal rights, unanimous shareholder approval was required.  Alternatively, if the Memorandum allowed a manager to be dismissed, a special resolution was necessary.   Going forward, LLCs may want to consider their manager dismissal rights, particularly if the Memorandum is silent.  This may be important in an LLC in which the minority shareholder has made all of the investment and exercises day to day management of the LLC;
  • Quorum and voting: The basis on which the quorum and voting at general meetings is calculated has been amended under the New Law, both for ordinary resolutions and special resolutions.  The relevant provisions in a Memorandum may need to be amended to ensure that they continue to provide the same level of voting control for the shareholders as currently exists, particularly those holding a minority of the shares.

Other potential amendments

  • Deregulation of notices: The New Law allows for notices of general meetings to be given in any way set out in the Memorandum.  Therefore, it is open to a company to provide for notices to be given by way of electronic communication, as well as hard copy registered notices.  This will significantly improve the efficiency of convening general meetings;
  • Shorter notice: The New Law permits shareholders to agree to shorter notice. Market practice will determine after the New Law is implemented whether it is possible to specify the shorter notice required in the Memorandum.

The way forward

Directors/Managers should also check that any other provisions of the Memorandum do not expressly contradict the New Law.

As with many new, important pieces of legislation, it may take some time for the whole impact of the New Law and its interpretation to be understood by the market and to be fully reflected in practice.  However, managers/directors are well advised to think about the changes which may need to be made, not only to the existing Memorandum, but also to the way in which they conduct their corporate affairs from today.