Limited Liability Company: requirements under new UAE Commercial Companies Law

The new UAE Commercial Companies Law (Federal Law No. 2 of 2015) (“CCL”) came into effect on 1 July 2015. It replaced previous Law No 8 of 1984. A fine of AED 2000 per day of delay will be imposed on any company that fails to amend its MOA before 1 July 2017 to be compliant with the provisions of the new CCL. 

Of critical importance is that fact that if a company does not comply with the new law by 1 July 2017, it will be deemed dissolved (Article 374). This is taken to mean that an LLC will need to have made necessary amendments to its Memorandum and Articles of Association (MOA) to ensure compliance to continue to exist. In addition, Article 357 provides that a fine of AED 2000 per day of delay will be imposed on any company that fails to amend its MOA to be compliant with the provisions of the CCL. 

Whilst the CCL introduces some new concepts and approaches, most of the essential features of the previous Law are maintained. Despite media speculation, the CCL applies the same conservative approach in relation to foreign ownership restrictions under the previous Law, so foreign investors are limited to 49%.  Also, the CCL does not allow sell-downs in IPO deals.

The following is a snapshot of the key developments brought about by the new CCL in relation to Limited Liability Companies in comparison to the previous Commercial Companies Law No.8 of 1984 (“Previous Law”):

  1. Article 71 – Sole ownership – Article 8 provides that a limited liability company may be established by one natural or corporate person. Under the Previous Law, limited liability companies may only be established by a minimum of two founders and a maximum of fifty. The maximum limit of fifty partners still applies under the CCL.

 

  1. Article 79 – Pledge of shares - The CCL provides that limited liability shares may be pledged. The Previous Law was silent in respect of pledge of shares, and so it is questionable whether shares can be pledged legally. This new development will assist raising of debt finance by owners of limited liability companies and will enhance the security package that can be offered to the financiers. Pledge of shares will add another level of comfort to beneficial owners of shares (foreign investors) in respect of their shareholding. 

 

  1. Article 80 – Preemption Rights – preemption rights are still mandatory by operation to law under the CCL, as is the case under the Previous Law.

 

  1. Article 83 – Company’s Managers – Under the CCL, companies may appoint one or more managers without setting out a maximum number of managers. Under the Previous Law, the maximum number of mangers was five.

 

  1. Article 86 – Competition – Under the CCL, manager(s) of a company may not be allowed to operate any business in competition with the business of the company in question. Defaulting manager(s) will be discharged and compensate the company accordingly. This matter was not addressed under the Previous Law.

 

  1. Article 93 – Invitations to General Assemblies– Invitations to general assemblies need to be sent out 15 days before the date of the meeting or less than 15 days if all partners agree. Under the Previous Law, the notice period required is 21 days which may not be abridged.

 

  1. Article 96 – Quorum for General Assemblies – Under the CCL, general assemblies will not be valid unless attended by partners owning 75% of the capital of the company. If the quorum is not satisfied in the first meeting, the second meeting shall be called for within 14 days from the first meeting, which shall not be valid unless attended by partners owning 50% of the capital of the company.  If the quorum is not satisfied in the second meeting, a third meeting shall be called for after the lapse of 30 days from the date of the second meeting, which shall be valid regardless the quorum attended such meeting. Resolutions of general assemblies shall only be valid if approved by partners owning at least 50% of the capital of the company. Under the Previous Law, general assemblies may only be valid unless attended by partners owning 50% of the capital of the company. If the quorum is not satisfied in the first meeting, a second meeting shall be called for within 21 days from the first meeting, which shall be valid regardless of the quorum attended such meeting. Any amendment to the articles of the company requires the approval of partners owning at least 75% of the capital of the company.

 

  1. Article 103 – reference to joint stock companies rules – Article 103 of the CCL refers to the rules governing joint stock companies with respect to any matter which is not addressed under the rules of limited liability companies. Such reference is not provided for under the Previous Law.

 

The matters that may require consideration and amendment in an LLC’s memorandum of association are set out in the table below.

Subject

                       Required changes

Shareholder details:

 

The name, nationality, date of birth and domicile of each shareholder must be provided in the MOA. 

If the managers/directors are named in the MOA, their full names, nationalities, places of residence and powers

Quorum: 

The CCL sets the quorum for the general assembly at shareholders representing 75% of the share capital of the LLC, as opposed to the previous threshold of 50%. Where the 75% quorum is not met at the first meeting, the meeting shall be adjourned and a second meeting will be held where the required quorum will be 50%.  In the event such 50% quorum is not met at the second meeting, a third meeting shall be held where the quorum shall be valid irrespective of the shareholders present at the meeting.

In the event the company’s MOA stipulates a 50% quorum threshold for the first called general assembly, this will need to be amended to reflect the new position under the CCL.

Right of first refusal: 

The selling shareholder must provide in its pre-emption notice to the continuing shareholders the name of the proposed purchaser in addition to the terms of sale, such as price. On a dispute as to price, the Previous Law provided that the company’s auditor would adjudicate on price.  The new CCL requires value to be determined by a DED appointed financial expert.

Financial: 

The CCL requires LLCs to use International Accounting Standards and this should be reflected in the MOA. The CCL requires that the MOA stipulate the commencement and expiry date of the fiscal year.

Branches:

In addition to the head office, the MOA must also now list any branches that the company has (if any).

References:

Any references to the Previous Law in the MOA should be updated to refer to the applicable provisions contained in the CCL.

Optional changes

 

Notice period: 

Shareholders now have the option to reduce the previous 21 day notice period for general meetings to 15 days or such shorter notice period as agreed between the shareholders    

Form of notice:

Notice of meetings The CCL permits invitations to general assemblies to be sent by any means of communication that the shareholders agree upon, as opposed to the previous position which required registered mail.  This means that the MOA could be amended to permit email communications

Dismissal of manager: 

The new CCL provides for the dismissal of managers by way of an ordinary resolution at a general meeting as opposed to the previous position under the Preious law requiring a special resolution if the MOA permitted dismissal of the manager, or unanimous resolution if the MOA was silent. In light of the fact that the manager can now be dismissed by an ordinary resolution, companies should consider including a higher threshold in their MOAs. 

Share pledges:

Since the new CCL provides for shares to be pledged in accordance with the CCL and the company’s MOA, shareholders are advised to consider whether to detail the terms upon which shares may be pledged in the MOA.

 

Considering that the deadline for the compliance is approaching, companies would be well advised to review their constitutional documents and make the necessary changes as soon as possible. Once consideration has been given to the amendments to be made to a company’s constitutional documents, the Amendment to MOA or a new Memorandum and/or articles of Association need to be drafted, executed by the shareholders before the notary public and submitted to DED for registration.