UAE: Incremental reforms to the Companies Law set to change investment landscape
Ahmed Ibrahim of Ibrahim & Partners explains the key differences that the amendments will bring to the financial and corporate sphere in the UAE
After weeks of speculation between UAE law firms, Law No. 26 of 2020 (New Law) amending a total of 51 articles of the Commercial Companies Law No. 2 of 2015 (Companies Law) is now available. It came into force on January 2 2021, with three further exceptions that will come into force after six months from the date of publishing of the New Law.
The New Law introduces key incremental reforms that have been long-awaited by the business and the legal community in the UAE since the promulgation of the new Companies Law back in 2015. Finally, the New Law puts an end to the inherited conservative approach in relation to foreign ownership restrictions. With particular exceptions that will be unveiled soon, under the New Law, foreign investors are allowed to own up to 100% of their UAE business and no service agent is needed for branches of foreign companies.
The New Law addresses most, if not all, the exemptions that have always been sought by companies considering an initial public offering (IPO). After a marathon of prolonged and extended discussions with UAE regulators, the legislation has taken into consideration all the exemption requests in formulating the New Law and has sought to accommodate the fair demands of investment bankers, international underwriters, auditors, and IPO candidates.
In addition to the foreign ownership restrictions, the New Law touches upon key matters that have always been a concern to all IPO participants and stakeholders. These key matters include: the nationality of board members of public companies, founders’ lock-up periods, the scope of financial assistance, the joint liability of IPO advisors in respect of the content of prospectuses, the terms of auditors’ mandates, the limitation on the ability of founders to sell-down in IPOs, and many other strategic and crucial matters.
This article sheds light on the main fresh concepts enacted under the New Law, the differences between the provisions of the New Law and the same provisions under the existing Companies Law, and seeks to highlight the practical impact of these differences. It is divided into five main sections: (i) general provisions; (ii) new rules applicable to limited liability companies (LLCs); (iii) new rules applicable to public companies; (iv) new rules applicable to private joint stock companies; and (v) concluding provisions.
This article follows the same sequence of the New Law, though it is worth noting that the key reforms start from Article 112 of the New Law.
Article 6 – Corporate governance: The New Law defers to the Minister of Economy to introduce corporate governance rules that will be applicable to companies. The repealed provision provides that private joint stock companies with more than 75 shareholders had to abide by the relevant corporate governance rules. It is not clear if this rule is abolished by the amended article.
Article 10 – Activities with strategic impact: This article is long-awaited and was expected to be included in the Companies Law back in 2015. The New Law, repeals the existing provision titled ‘UAE Ownership Percentage’ that imposed the restriction of foreign ownership and required all companies to be owned at least 51% by UAE nationals, paving the way for foreign investors to own and control their own business without any complicated and costly contractual arrangements with a UAE sponsor. In principle, companies may now be owned 100% by foreigners. By way of exception, the new article provides that the UAE cabinet, in conjunction with a new committee to be formed by the cabinet, shall prepare a list of activities that require a minimum UAE ownership.
Article 11 – Practice of activities: The new article abolishes the requirement that investment of funds may only be carried out by public joint stock companies as stipulated under the repealed provision, opening the door for private companies to carry out investment activities.
New rules applicable to LLCs
Article 71 – Definition of company: Sole-shareholder companies need not be owned by a UAE national (or by a company owned by a UAE national). This follows the revocation of the minimum UAE ownership percentage, and so, subject to the list of ‘activities with a strategic purpose’, sole-shareholder companies may now be owned by a non-UAE national or by a company owned by a non-UAE national.
Article 73 – Companies MOAs: Going forward, the memorandum of association (MOA) of LLCs must indicate a dispute resolution forum to resolve any dispute that might arise between the company and its shareholders and between the shareholders themselves.
Article 93 – Invitations of general assembly meetings: The new concepts introduced under this article are twofold:
As per the recommendations of the World Bank in respect of ease of doing business reviews, invitations to general assembly meetings must be published 21 days prior to the date of the meeting. As a point of interest, the repealed Companies Law No. 8 of 1984 had the same timing requirement to publish the general assembly invitation, which was abolished by the Companies Law No. 2 of 2015. The New Law comes to reinstate the repealed rule, requiring companies to publish the invitations for general assembly meetings 21 days prior to the date of the meeting. This should not be a concern to LLCs in view of its private nature but will of course have an impact on public joint stock companies.
In view of the COVID-19 pandemic, the New Law allows companies to have general assembly meetings via electronic means. This concept was introduced during the lockdown and the New Law provides a legislative foundation for such practice, ending any potential legal challenges by shareholders where the general assembly meetings took or will take place via electronic means.
Article 96 – Attendance quorum of general assembly meetings and voting requirements:The New Law relaxes the requirements under the existing law as follows:
Reducing the quorum of LLCs from shareholders owning 75% of issued share capital of the company, to 50% only;
There will be no requirement to hold a third meeting, if the quorum is not satisfied in the first meeting, the second meeting will be valid regardless of the number of shares attended or represented in the meeting; and
The second meeting will have to take place after no less than five days but no more than 15 days from the date of the first meeting.
Article 101 – Increasing or reducing the share capital: For the first time, the New Law introduces a new mechanism to allow shareholders to resort to courts to increase the issued share capital of a company where the quorum to increase the capital (being 75% of the shares represented in the meeting) is not met and the company in question suffers insolvency issues.
New rules applicable to public companies
The newly introduced rules in respect of public joint stock companies are the highlight of the New Law’s changes.
Below are the key incremental reforms:
Article 112 – Founders committee: In an unprecedented approach in the UAE, the New Law abolishes advisors’ and offering participants’ liability in respect of the accuracy and completeness of information and reports submitted to regulators in an IPO process. Now, the liability lies solely with the founders committee of the company in question. Previously, all advisors and offering participants (including legal counsels, banks/underwriters, auditors, valuers, etc.) were jointly liable with the founders committee for the accuracy and completeness of information shared with different regulators. This is one of the articles that all companies going public seek a cabinet exemption from. Such a provision meant additional contractual arrangements between the companies going public and their advisors to ensure a proper and fair indemnity from the company to all offering participants. This will not be needed anymore.
Article 118 – Valuation of in-kind contribution: The new provision brings more relief to valuers, particularly the big four auditing/accounting firms that are extending valuation services to public joint stock companies. Valuers will not liable anymore in respect of their valuation reports of in-kind contributions, but rather the liability again lies with the founders committee. It has always been a common practice that valuers heavily disclaim their valuation report to avoid potential liability under the old provision to protect their position, and it is expected that valuers will, in any case, continue to heavily disclaim their valuation reports even after the new amendment to Article 118.
Article 121 – Invitation for public subscription: Article 121 has always raised a lot of complaints from offering participants. The provision assumed that the founders' committee, the company's counsels and advisers and other parties involved in the IPO process and their representatives were jointly liable for the accuracy of the information in the prospectus. As Article 121 had a very broad remit, it continued to have a negative impact on the appetite of international banks to play a leading role in the UAE capital markets. Also, this liability was not in line with international or regional market practice, where each offering participant is only liable for its input and participation in the offering documents. In response to numerous exemption requests in previous and ongoing IPOs, the legislator has limited the scope of liability of each offering participant to their relevant scope of work, without being jointly liable for the work products of other participants.
Article 123 – Underwriters: In view of the new amendments, it is expected that the Securities and Commodities Authority (SCA) will issue new rules to regulate the underwriting activities in the upcoming IPOs.
Article 139 - Amendments of the articles of association (AOA): In a bold attempt to limit the workload of the Department of Economic Development (DED) in respect of the amendments in the AOAs of public joint stock companies, the amended Article 139 provides that the the approval of the DED on amendments to the AOA is not required. It remains to be seen how this new article will be implemented in practice, and if the DED will truly cease interfering in public companies’ wishes to amend their articles in a manner that their shareholders deem appropriate.
Article 144 – Election of board members: Surprisingly, this article reconfirms a redundant approach introduced back in 2015, by giving public companies the right to appoint expert board members not from within the pool of shareholders. As a matter of law, board members need not be a shareholder, and thus this article remains redundant and its application in practice is moot.
Article 151 – Nationality of board members: The amendment of this article has been long-awaited and is far overdue. The article required the majority of board members of public companies to be UAE nationals. Under the New Law, the requirement of having UAE-national board members will be limited to the companies that will be practicing activities with strategic impact as per Article 10 of the New Law. Having said that, this article will only come into force after six months from the publication of the New Law.
Article 153 – Prohibition to extend loans to board members: In principle, companies may not extend loans to their board members. The repealed Companies Law No. 8 of 1984 exempted insurance companies and financial institutions under the supervision of the UAE Central Bank (CB) from the application of such rule. In 2015, the Companies Law No. 2 of 2015 abolished such exemption so that all companies, including financial institutions, were prohibited from extending loans to their board members. The approach introduced by the article raised the concerns, the New Law addresses this issue by exempting financial institutions from the application of Article 153.
Article 162 – Liability of board members and executive management: The amended article sets out the parameter of who falls under the definition of ‘executive management’. It also penalises any board member, who is found to be guilty by a final court judgment of fraud, abuse of power, or if entered into related party transactions or transactions where there is a conflict of interest in breach of the Companies Law, to be discharged from the board of directors immediately by operation of law. The discharged board member may not be re-elected for board membership for a period of not less than three years from the date of the court judgment.
Article 172 – Invitation of general assembly meetings: Invitations to general meetings must be sent 21 days prior to the date of the meeting instead of 15 days under the old provisions. For more information, please see the commentary above on Article 93.
Article 174 – Shareholders’ request to call for a general assembly meeting: Now, shareholders owning a minimum of 10% of the issued share capital can call a general assembly meeting. Under the old provision, the minimum required was 20%.
Article 176 – SCA’s request to call for a general assembly meeting: The amended article provides the SCA with the right to call a general assembly if: (i) the number of board members falls below the minimum requirement to have a valid board meeting; (ii) if there is a breach of law or the AOA by the company in question; and iii) if the board fails to call for a general assembly as per the Companies Law.
Article 180 – Competencies of the general assembly: Now, shareholders owning a minimum of 5% of the issued share capital may add a new agenda item to the general assembly meeting. Previously, the minimum required percentage was 10%.
Article 184 – Withdrawing from the general assembly meeting: The amended article regulates the scenario where one or more shareholders withdraw from the general assembly meeting after they register their attendance. In which case, the voting quorum will be adjusted accordingly, so that resolutions will be passed by the majority of votes represented in the meeting after disregarding the shares of the withdrawn shareholders.
Article 186 – Voting in general assembly meeting: The New Law accommodates the new challenges of COVID-19 and allows companies to have electronic voting instead of physical attendance, for so long as all the applicable rules are adhered to.
Article 193 – Share capital: As per the amended article, the concept of the authorised share capital has been abolished. This concept was introduced for the first time under the Companies Law No. 2 of 2015, whereby the board of directors can increase the issued share capital of a company within the limit of the authorised share capital without resorting to the shareholders. The concept of authorised capital is beneficial, provides a degree of flexibility, and saves the logistics required for calling a general assembly. It is not clear what the motivation behind this is, and it can be stated that the deletion of such a concept would be a step backwards.
Article 204 – Reduction of capital: In recent times, a number of companies have reduced their issued share capital to extinguish the accumulated losses and ‘clean’ their balance sheet. One of the key hurdles faced by all companies that were considering reducing their capital was the obligation to submit an undertaking that must be signed by the majority of board members confirming that the company in question can pay its debts despite the capital reduction and that the board members are jointly liable vis-à-vis the creditors of the company (in their personal capacity) if the company fails to pay its debts. Such undertaking was a turn-off to all companies that were considering reducing their share capital to extinguish their losses and ‘clean’ their balance sheet and has been replaced with slightly more relaxed requirements.
Article 222 – Financial assistance: The New Law amends Article 222 by explicitly excluding any indemnities, guarantees or compensation that a company pays to the company’s underwriters from the application of Article 222. Under the old provision, underwriters had to rely on a ‘back-up’ indemnity from the shareholders of the company to protect themselves if the indemnity provided by the company to the underwriters is found to be in breach of Article 222. Now, this practice comes to an end after the explicit exclusion of indemnities, guarantees or compensation that a company makes to the company’s underwriters from the application of Article 222.
Article 224 – Strategic investor: The requirements for an investor to qualify for ‘strategic investor’ status is relaxed under the New Law, whereby all the pre-requisite conditions have been abolished. Previously, a strategic investor must be carrying out similar or complementary activities to the company and had to have at least two financial statements issued. All of these requirements have been abolished. This means that a strategic investor can be an individual and not necessarily a corporate entity as was provided for under the repealed article. However, it remains to be seen if the SCA will still prohibit a strategic investor from being an existing shareholder in the company.
Article 243 – Appointment of auditors: Now auditors may stay auditing the same company for six years, provided that the partner in charge must be replaced after a maximum period of three years. Under the old provisions, auditors may not audit a company for a period of more than three years. This is good news to auditors and companies and provides a degree of stability between companies and their auditors.
New rules applicable to private joint stock companies:
Article 255 – Incorporation of private joint stock companies: Under the old provisions, the shareholders of private joint stock companies may not exceed 200 shareholders. This cap on the number of shareholders has been abolished, and there is now no maximum number of shareholders.
Notwithstanding this, it is to be noted that the founders of private joint stock companies are still subject to a lockup period of one year, which is something that is not in line with the new amendments to the lockup periods explained below.
Article 279 – Sell-down in IPOs: The New Law allows the shareholders to sell up to 70% of the issued share capital of the company in an IPO and may exceed this percentage subject to the approval of the board of directors of the SCA.
Technically, the drafting of this article is incorrect. The article indicates that the “company” has the right to sell up to 70% of the issued share capital in an IPO, while from a technical standpoint, it is the shareholders/founders who would be selling, not the company. The reference to the company’s ability to sell shares should technically be a primary offering, i.e. offering by way of a capital increase.
Article 279 – Lockup period: This is a landmark development, whereby founders will only be subject to a lockup period of six months. This comes in line with the international best practice, where there is always a contractual six-month lockup period on founders. Again, this is one of the recurring provisions from which many companies have sought exemption.
Article 292 – Acquisition: There has been a lot of discussions around the amendment of this article. The underlying rational can be summarised as follows: Under merger and acquisition rules of the SCA, there is a provision that allows an acquirer who owns 90% or more to ‘squeeze-out’ the minority shareholders. Similarly, the minority shareholders may oblige the majority shareholder who own 90% or more to buy them out. The concept of ‘squeeze-out’ is perceived to be conflicting with a constitutional right that protects individual property from being confiscated. Article 292 has been amended to relay a legislative foundation for the ‘squeeze-out’ right. However, this article is, as it stands, too vague and ambiguous. It is hoped that the SCA will issue executive regulations quickly to add more colour to the article in question.
Article 292 – Acquisition by way of issuing new shares: Article 292 introduces a new concept whereby a public joint stock company may acquire a new company and pay the consideration for the acquisition in a form of new shares. In this case, the issuance of new shares does not trigger pre-emption rights of existing shareholders.
Article 357 – Reconciliation: Companies are required to be in compliance with the provisions of the Companies Law as amended by the New Law within one year, the failure of which will trigger a penalty of AED 100 (approximately $27) per each day of delay in complying with the provisions of the New Law.
Revocation of Article 329: The New Law revokes Article 329 of the Companies Law, which requires all branches of foreign companies to have a UAE service agent. Thus, branches of foreign companies need not appoint a UAE service agent. This article will come into force after six months from the issuance of the New Law.
The new amendments come in line with the ongoing legislative reform in the UAE since 2016, particularly after the promulgation of the Bankruptcy Law. Since then, a lot of dynamic and vigorous changes in the UAE legal infrastructure has been witnessed, with the aim to create a more friendly and graceful investment environment to foreign investors. It will take time to see the full impact of these changes on the UAE economy and ease of doing business.
Managing partner, IBRAHIM & PARTNERS