What changes faster than the weather in the UAE is rules and regulations. And we are not complaining! Rather we are happy! Because change is for good, especially when it is related to your business. After all, you are doing business in a country where the government loves going all the whole hog for making it the most business-friendly nation in the world. Entrepreneurs and business persons have always been on the radar of the UAE Government. And we couldn’t agree enough after coming across the new amendments in the Commercial Company Law that were announced in the last quarter of 2021 when the UAE was turning 50. You sure are excited to know what these changes are, and how they can impact your business positively. Since you don’t have time to get your head around tons of valuable resources available on their website, we are going to simplify them for you to comprehend in the form of highlights. But before that, let us inform you that – the new laws are lighter, stronger, and have a bigger sweet spot!
Background: A Quick Recap
On 27th November 2021, His Highness Sheikh Khalifa bin Zayed Al Nahyan, as part of the goals of the fifty, approved 40+ largest-ever legislative amendments in three of the new economic laws – Commercial Companies (Federal Decree-Law No. 32 of 2021), Commercial Registry (Federal Decree-Law No. 37 of 2021) and Trademarks (Federal Decree-Law No. 26 of 2021), to mark the occasion. Reflecting global best practices in the new legal provisions, the amendments are the result of intensive coordination of 540 specialists and experts from 50 federal and local authorities with more than 100 private sector organisations with an aim to further enhance the UAE’s economic environment, investment and commercial infrastructures and to support the security and stability of the society, keeping pace with the country’s future growth aspirations. The New Law repealed and replaced Federal Law No. 2 of 2015 (“Old Law”) with Federal Decree-Law No. 32 of 2021 on Commercial Companies with a total of 55 updates – the deletion of 1, the addition of 3 and the replacement of 51. The updates include a number of new provisions that support the shift toward the new economic model in the country in line with the principles of economic openness, flexibility and proactiveness.
Importance
Effective already from 2nd January 2022 in the UAE, the New legislation on “commercial companies” is all the rage this year. Being a business owner, you must know what changes have been done and implement them before the deadline i.e., 2nd January, 2023 approaches (subject to any further extensions),to steer clear of fines. The changes herald a new wrinkle in the way you run a company while puffing up social stability and security as well as ensuring the rights of both individuals and institutions.
New UAE Commercial Companies Law: Objective
From acknowledging the concept of a SPAC to permitting companies to convert into a public joint-stock company and licenced branches of foreign companies into a commercial company with UAE citizenship to so much more, myriad legislative reforms have been done by the UAE Government in the country’s legal system to beef up economic, investment and commercial opportunities. Not only do these amendments aim to enhance the legislative frame in various sectors, including investment, trade, and industry but also commercial companies, and regulation and protection of industrial property while keeping pace with the nation’s future growth aspirations.
A Gentle Caveat
Companies registered in the UAE are mandated to make necessary adjustments in accord with the key changes under the New Law, within one year (subject to any further extension) commencing from 2nd January 2022. It is important to ensure the requirements of the New Law are applied and reflected in the Memorandum of Association of such companies (if applicable).
Amendments at a Glance
The New Law has now capsulized the changes submitted in the 2020 Amendment and has also presented specific amendments that include the introduction of:
- Two new company structures namely the special purpose acquisition company (SPAC) and the special purpose vehicle (SPV)
- Nominal amendments to the provisions related to Limited Liability Companies (LLCs)
- Amendments to certain provisions pertaining to PJSCs and the introduction of a regime to enable the division of Joint Stock Companies (JSCs)
A Summary of Major Highlights
Under the CCL2021:
- A Company can be incorporated for the purpose of, and to specifically deal with acquisitions or mergers.
- The maximum and minimum percentage of the founders’ contribution to the company’s capital at the time of the public offering is nullified and the legal limitation of the subscription period is cancelled as well while leaving the two matters to what is defined in the prospectus.
- The requirement for the nationality of the members of the board of directors has been eliminated. The organization shareholders’ decisions in the election of board members are upheld if they are in accordance with terms and conditions set by the competent authority
- A public joint-stock company is allowed to convert itself. Plus, they can now sell their shares or offer new shares in a public subscription without being restricted to a certain percentage, by obeying the price-building mechanism of the security.
- Foreign company branches licensed in the UAE are permitted to transform into a commercial company with UAE citizenship
- Companies are allowed to divide and create legal rules governing division operations, thus contributing to diversifying the company’s activities and fields of work and increasing its projects and growth opportunities
- Companies are able to ascertain the face value and the percentage of the offering
- Companies through the issuance of other types of shares can raise finances and find other financing solutions.
Salient Features of UAE’s New Commercial Companies Law (CCL 2021)
Introduction of New Corporate Vehicles – SPACs & SPVs
The new CCL 2021 brings to the table SPAC and SPV and both are exempt from the New Law. In case you are living under the rock, the former is defined as a PJSC classified by the UAE Securities & Commodities Authority (SCA) as a company that is solely run for the purpose of mergers and acquisitions of other companies and the latter is termed as a company incepted to fulfil the specific purposes revolving around ring-fencing obligations and assets linked with certain financing availed by the SPV. The financing options can range from credit transactions, borrowing, securitisation, issuance of bonds to transfer of risk associated with insurance, reinsurance and derivative operations, in accordance with the regulations issued by the SCA in this regard. The regulatory guidelines to run both the forms are yet to be issued by SCA. In the meantime, the operations of SPACs & SPVs will continue to be regulated by the CCL 2021.
Reduced Notice Period for Creditors of Liquidation
CCL 2021 has slashed the notification period for submission of creditors’ claims against a company being in liquidation to 30 days which was 45 days earlier under CCL 2015 and the amendments thereof.
Changes to the Provisions of Limited Liability Companies (LLC)
Expiration of the Board of Managers’ Term
In the event of expiration of the term of the Board of Managers, if the LLC has not found the replacement yet, it is allowed to carry on with the existing board for a maximum period of 6 months. In the given grace period if the LLC still fails to seat a new board of managers the Department of Economic Development (DED) can establish a board for the term of one year, but during this time frame, the LLC has to appoint a new Board of Managers. Therefore, the appointment of the Board of Managers by the DED is an interim arrangement that will be regularised in case the LLC is unable to appoint the board itself.
Supervisory Board Revised
Unlike in CCL 2015 and the amendments thereof that obligated LLCs to appoint a Supervisory Board when the company consists of more than seven (7) shareholders. CCL 2021 has increased the number of required shareholders to fifteen (15). The Supervisory Board is appointed by at least three shareholders to supervise the company’s annual reports, budgets distribution of profits and also supervise the LLCs managers and submit a report in this regard to the General Assembly.
Lower Statutory Reserves
10% LLC statutory reserves is old news now. Under the new commercial company law, the LLCs just have to allocate 5% of their net profits each year to the legal reserves. This 5% reduction in statutory reserves is going to make a huge difference in terms of savings and further investments.
LLC Memorandum of Association (MOA)
The LLC company’s MOA must feature methods for settling any disputes which may crop up between the company and any of its managers/directors or between the shareholders, relating to the business of the company.
Tweaks in General Assembly Meeting
- An individual who is not a manager is allowed to function as a proxy for a shareholder at a general assembly meeting
- The notice period to convene a general assembly which was 15 days earlier is now changed to 21 days
- The new law brings with it a relaxation of quorum requirements whereby in the event a first meeting is inquorate and a second meeting is held, there will be no quorum and the meeting shall be deemed validly constituted (notwithstanding the provisions of the memorandum of association).
Key Amendments to PJSCs
Convening General Assembly Meetings for a PJSC
The New UAE Commercial Companies Law now explicitly provides for SCA approval prior to convening a general assembly for a public joint stock company, a requirement which was provided for in SCA Decision No. 3 of 2020 (as amended) but not the Repealed Companies Law.
Nominal Value of Shares
The previously put restrictions on the nominal value of shares (minimum of AED 1 and a maximum of AED 100) have been removed under the new CCL 2021. Simply put, the nominal value of shares may go below AED 1 and above AED 100, provided such nominal value of the shares is equal to the amount specified in its Articles of Association.
Fresh PJSC Director Provisions
Appointment: New provisions pertaining to directors of PJSCs have been rolled out, including that if a director resigns before the expiry of their term, a replacement must be found within 30 days and such new director shall be presented to the general assembly and must complete the departing director’s remaining term. Insofar if no appointment is made within such a thirty-day period, then the agenda for any subsequent general assembly meeting must include the election of a board member to fill the vacancy.
Remuneration: Under CCL 2021 directors are allowed to receive a bonus not exceeding 10% of the company’s profit. As an alternative to this, a member of the board of directors is eligible to be remunerated an aggregate amount of no less than AED 200,000 at the end of the relevant financial year even if a PJSC makes no profits in a financial year, provided this is permitted under the Articles of Association of the PJSC and following the approval of the General Assembly.
The General Assembly Meeting: The CCL 2021 specifies that the invitation to a meeting of the General Assembly would now be in conformity with the conditions and procedures issued by the SCA and after acquiring the SCA’s approval. The invitation for the meeting must be announced 21 days prior to the date of such meeting unless shareholders holding at least 95% of the company’s share capital consent a period less than 21 days before convening the General Assembly meeting.
Issuance of Discounted Shares: The CCL 2021 allows the issuance of discounted shares if the market value of a company’s share price drops below the nominal value of its shares, provided the company passes a special resolution and receives the approval of the SCA. The CCL 2021 stipulates that the negative reserve created as a result of the issuance of shares at a discount must be settled from its future profits before any profit can be dispersed amongst the shareholders.
Corporate Social Responsibility (CSR): CCL 2021 authorises recently founded companies to deliver CSR and to reserve any profits for such a cause. This dismisses the limitation stipulated by CCL 2015 and the amendments thereof, that only permitted a PJSC to contribute to CSR if it had been set up for at least two financial years with an upper limit contribution of 2% of the average profits for the last two financial years. In addition, unlike CCL 2015 and the amendments thereof, CCL 2021 mandates public disclosure on the company’s website even if it does not contribute to CSR.
Division of a PJSC: The UAE’s new Commercial Companies Law presents the concept of PJSC division. Such division can either be (a) horizontal, in which the same shareholders own directly the shares of the resulting company pro rata to their shareholding in the parent company) or (b) vertical, in which the shareholders of the parent company own the new shares through the new division subsidiary). In regards to the procedure for such division, the Board must devise a “detailed division project” having vital details as prescribed by the CCL 2021 and get it approved by General Assembly. After approval of the General Assembly, no objection from the SCA or the ministry or economy (as applicable) must be acquired before the “detailed division project” can be implemented.
Compliance with the New UAE Companies Law
All existing companies formed in the UAE have been mandated to amend their MOA and AoA AOA within 12 months’ time commencing from 2nd January 2022, the date when CCL 2021 came into force (subject to any further extension), to stay compliant and to steer clear of expensive and unpleasant troubles such as hefty fines, as may be defined by the Cabinet. Be informed, the extension of the one-year deadline is possible only if the Council of Ministers approves the request.
Eat the Frog with Adam Global
Not literally! We just mean “just do it” because you have to do it. Our qualified and experienced company secretaries in Dubai, UAE are there to help you in accomplishing the daunting task. Any changes in law and adjusting yourself to the change could be challenging especially if you are a bit wet behind the ears. The New Companies Law has already come into force on the 2nd January, 2022 and you still have plenty of time on your hands to adapt to the change. But procrastinating the task of adjusting your company’s position to reflect the New Provisions will do no good to your business rather it will harm it. Do we need to mention how! So, why wait when you have some of the best corporate secretaries in your city. Whether your business is big-scale or small-scale, 100% owned by you or shared with local Emiratis, service-based or product-based, operates on a commercial licence, professional licence or industrial licence, located in Dubai or any other emirate of the UAE, speak to us if you need any assistance regarding the New Commercial Companies Law. Our professional corporate secretaries and corporate lawyerswill also help you interpret the implications of the changes for your business beforehand and respond appropriately. You may also get expert advice from our corporate lawyers on any of your corporate and commercial matters. If you are still not sure how we can assist you regarding the implementation of the New UAE Commercial Companies Law, book your first free consultancy with us.
