November 26, 2018

The New DIFC Companies Law

On 12 November 2018, the Dubai International Financial Centre (DIFC) introduced a long awaited new companies law regime affecting all entities registered in the financial free zone. This article outlines the key changes introduced by the new law, and what it means for businesses based in the DIFC.

The new companies law regime comprises of the new DIFC Companies Law (Law No. 5 of 2018), the Operating Law (Law No. 7 of 2018), the Companies Regulations, the Ultimate Beneficial Owner Regulations and the Operating Regulations (the New Companies Law). Copies of the new laws and regulations can be accessed on the DIFC online Legal Database at https://www.difc.ae/business/laws-regulations/legal-database/.

Who is affected by the New Companies Law?

The New Companies Law will affect all types of entities already registered in the DIFC, as well as those entities that are currently in the process of setting up in the DIFC or considering a future incorporation in the financial free zone. The legislation has been long awaited by international and regional stakeholders alike, including SMEs, individual and corporate shareholders, directors, and financial advisory and legal professionals.

The table below highlights the key changes introduced under the New Companies Law and how these provisions differ from the previous DIFC Companies Law (Law No. 2 of 2009) (the Old Companies Law).

Issue Old Companies Law New Companies Law  Practical Steps 
Types of Companies 

The Old Companies Law recognised three main types of companies:

  • companies limited by shares;
  • companies with limited liability (LLCs); and
  • ‘recognised companies’ (i.e. branches of foreign companies).

LLCs are no longer recognised by the DIFC as a valid legal entity. The New Companies Law recognises the following types of companies only:

  • private companies (name to be followed by "Limited" or "Ltd");
  • public companies (name to be followed by "Public Limited Company" or "PLC"); and
  • ‘recognised companies’ (i.e. branches of foreign companies).

The New Companies Law has introduced new standard form articles of association (the Standard Articles). Companies’ existing articles of association will stay in effect to the extent they do not conflict with the New Companies Law. Where conflicts exist, the Standard Articles will apply. Companies have twelve months to update their articles of association as appropriate.

It remains possible for companies to adopt either an amended form of the Standard Articles or bespoke articles of association. In this instance, one of the company’s directors will be required to certify compliance with all applicable DIFC laws. A legal opinion from the company’s legal advisers is no longer required.

On 12 November 2018:

  • all LLCs were automatically converted into private companies;
  • all companies limited by shares that are publicly listed and/or have more than 50 shareholders were automatically converted to public companies; and
  • all other companies limited by shares were automatically converted to private companies.

All companies should now have received a notification of their new converted status (which can be contested within 30 days). All companies have a grace period of 12 months to transition for most matters from the Old Companies Law.

During the transition period companies are entitled to use their former names in communication, but they must amend their articles of association within the grace period so that they are consistent with the New Companies Law. Additionally, companies should consider updating their VAT registration with the Federal Tax Authority (FTA), through the FTA's online portal, regarding the change of name.

Pre-emption Rights

No statutory pre-emption rights. 

Under the New Companies Law, existing shareholders now benefit from statutory pre-emption rights providing protection against undue dilution of their shareholding. The New Companies Law does, however, contain a number of customary carve-outs to such rights including in respect of issues of bonus shares and shares issued in accordance with employee share schemes. Private companies are entitled to dis-apply statutory pre-emption rights in their articles of association.

Shareholders of both private and public companies are entitled to exclude or vary the statutory pre-emption rights by passing a special resolution (which has been recommended by the directors of the company) at a general meeting.

Private companies should consider whether or not statutory pre-emption rights should be disapplied in their articles of association. 

Public companies should consider the implication of pre-emption rights on future fund raisings.

Consent to Written Resolutions  Written resolutions of shareholders (both ordinary and special) required unanimous consent of shareholders. 

Both private and public companies can now pass written shareholder resolutions without unanimous consent from all shareholders.

Ordinary written resolutions can now be passed by a simple majority of shareholders entitled to vote. Special written resolutions can now be passed by shareholders holding at least 75% of the total voting rights.

Companies should note that shareholders no longer need to provide unanimous consent for written resolutions to pass.

Treasury Shares No reference to treasury shares.

A company may hold treasury shares, provided that there is no provision in its articles to the contrary and it is approved by an ordinary resolution. The New Companies Law contains detailed provisions regarding the treatment of treasury shares.

Companies to consider whether buying back issued shares or issuing treasury shares could be beneficial for the financials or the valuation of the company or for a practical use, such as an employee share scheme.
Directors' Duties Directors duties were restricted to acting honestly and in good faith and exercising such care and diligence as would be exercised by a prudent person in comparable circumstances. 

The New Companies Law sets out an extensive set of duties on directors of both private and public based on the provisions of the UK Companies Act 2006. Directors are now obliged to exercise independent judgement and are required by law to promote the success of the company.

As a matter of effective corporate governance, companies should consider providing training on directors' duties to directors and management teams.

Notice of General Meetings 

All general meetings had to be called on 21 business days' written notice.

General meetings can now be called on 14 calendar days' written notice.

Annual general meetings can now be called on 21 calendar days' written notice.

Both notice periods can be reduced in urgent cases with the requisite consent of shareholders.

Companies should consider the impact of reduced notice periods. Shorter notice periods could lead to speedier decision-making with less of a lag time for shareholder approval on key decisions. 

Audit Requirements

All companies were required to prepare and lay out audited accounts and auditor’s report before a general meeting for approval by the shareholders. 

The New Companies Law has created a carve-out for small private companies with annual turnovers of not more than US$5,000,000 and with not more than 20 shareholders from having to audit their accounts. Directors of every company are still required, however, to arrange for financial accounts to be prepared in relation to each financial year regardless of audit requirements.

Companies should assess whether or not they fall within the small private companies exemption. 

Filing Obligations

Requirement to file an annual return. 

Under the New Companies Law, all DIFC companies are now required to file a confirmation statement with the DIFC Registrar of Companies at the time of license renewal instead of filing an annual return. In addition, public companies must provide a written copy of the confirmation statement to any person who may request it (subject to payment of a reasonable fee).

Companies should put in place procedures to ensure that confirmation statements are completed accurately and submitted to the DIFC Registrar of Companies at the time of license renewal.
Register of Ultimate Beneficial Owner No requirement to retain a register identifying ultimate beneficial owner.

All DIFC companies (subject to certain exemptions) are now required to maintain a register of ultimate beneficial owners (individuals owning or controlling, directly or indirectly, at least 25% of a company). The register must be put in place within 90 days of the date of enactment of the law. It is not a public register, however it must be provided to the DIFC Registrar of Companies, which also needs to be notified of any changes.

Public companies which are listed on a recognised stock exchange are not required to maintain a register of ultimate beneficial owners, unless there is a person or entity which owns 25% or more of the shares of the public company.

Companies should put in place procedures to ensure registers of ultimate beneficial owners are prepared in accordance with the applicable time frame and any changes are notified to the DIFC Registrar of Companies.

Public companies should put in place a system for identifying when the 25% threshold is met.

Register of Debentures No requirement to retain a register of debentures.

Under the New Companies Law, companies which have issued debentures must establish and maintain a register of debenture holders.

Companies which have issued debentures should ensure that a register of debentures is created and maintained. 

Company Classification: Private and Public Companies

The New Companies Law distinguishes between private and public companies. Some of the key differences between these companies are set out in the table below:

Issue

Private Companies Public Companies 

Number Shareholders

1 – 50 shareholders 1 to any number of shareholders (no maximum)

Minimum Share Capital Requirement

No minimum US$100,000
Company Secretary Not required

Required

Name Name to be followed by "Limited" or "Ltd"

Name to be followed by "Public Limited Company" or "PLC"

Shares to the Public

May not make an offer of securities to the public

May make an offer of securities to the public 
Paid-Up Shares  Shares do not need to be fully paid-up 

Issued shares must be paid-up as to at least 25% of their value

Annual General Meeting

Not required (unless required in articles of association)

Required
Reduction of Share Capital

By ordinary resolution of the shareholders and subject to a newspaper publication and solvency certification process

By special resolution of the shareholders and subject to confirmation by DIFC court order involving consultation with creditors
Financial Assistance

Prohibited only if a subsidiary of a public company

Prohibited

How can we help?

The New Companies Law is likely to affect all entities established in the DIFC to some degree. It is essential that management teams familiarise themselves with the new regulatory framework in order to update their articles of association and put in place procedures to ensure compliance with the new requirements. Our team would be delighted to assist in providing advice on the changes required for your DIFC company in light of the New Companies Law, structuring advice for new incorporations, as well as assistance with on-going registration and filing obligations.

For further information on how we can help, please contact the authors of this article.