2021 in Review: The Legal & Regulatory Changes Impacting Commercial Companies in the UAE

Rima Mrad Partner rima.mrad@bsabh.com

The main legal and regulatory change impacted businesses across all sectors in the UAE in 2021, is the update to the Commercial Companies Law. On 20 September 2021, the UAE issued New Federal Decree - Law No 32/2021 on Commercial Companies (the “New CCL”) which replaced the previous draft issued under Federal Decree - Law No 2/2015.

The New CCL will take effect as of 02 January 2022 and included major changes as follows:

1. The Introduction of SPACs and SPVs

The New CCL recognized two new corporate structures namely the Special Purpose Acquisition Company (“SPAC”) and the Special Purpose Company (“SPV”).

A SPAC is defined in the New CCL as a Public joint stock Company that the Securities and Commodities Authority (“SCA”) has approved to classify as a SPAC without any other purpose in accordance with the provisions of the decision issued by the SCA in this regard.

An SPV is defined in the CCL as a company established with the aim of separating the obligations and assets associated with a particular financing operation from the obligations and assets of the person who incorporated it, and used in credit operations, borrowing, securitization, issuance of bonds, and transfer of risks associated with insurance, reinsurance, and derivatives operations, in accordance with the provisions of the decision issued by the SCA regulating this activity.

Although the New CCL did define a SPAC and an SPV nonetheless it did not elaborate on the applicable regulations to these structures including the basis for their constitution. They were included among the list of companies to which the New CCL will not apply. We note however that the reference to both of these structures in the way it is done further outlines the understanding that the New CCL does recognize the use of these structures in IPOs and in future financing transactions and dealings. The SCA is expected as well to issue specific circulars to address the regulations relating to the set up of both of these structures.

2. Corporate Governance

The New CCL referred to the Minister’s of Economy role to issue decisions regulating the governance for companies in accordance with international standards and practices. This does not include public joint stock companies which will fall under the jurisdiction of the SCA for this purpose and financial institutions regulated by the Central bank of the UAE as each of these authorities will handle the corporate governance regulations and guidelines applicable to the companies under their supervisions.  This is expected to enhance the transparency in respect of the appointment and role of board of directors and managers in companies such as limited liability companies and private joint stick companies.

3. Limited Liability Companies (“LLC”)

The New CCL provided for many changes that affect the way LLCs are managed and structured as follows:

• If the term of membership of an LLC’s Board of Managers expires and a new board is not appointed in the meantime, the incumbent Board of Managers will continue to manage the Company’s business for period up to 6 months. Once this period expires, the general assembly of the LLC shall immediately form a new Board of Managers otherwise the Competent Local Authority (Dubai Economy for Dubai and ADED for Abu Dhabi) can appoint a board from the partners for a period of 1 year after which the general assembly will have a further obligation to meet and form a board of managers.
• A manager in an LLC can act as a proxy for a shareholder at a general assembly meeting.
• If a quorum is not present in a general assembly meeting, a second meeting is convened, and a quorum will be considered present disregarding the number of shareholders attending. This will avoid deadlocks and will restrict the ability of the partners to require in their statutes a higher quorum for adjourned general assembly meetings.
• The statutory reserve of an LLC has been reduced to 5 % (previously it was set at 10% minimum).

4. Public Joint Stock Companies (“PJSC”)

There are many changes as well affecting PJSC’s as follows:

• The minimum and maximum percentage of shares that the founders of a PJSC were required to subscribe to has been removed and instead the New CCL referred to the limits of percentage specified in the prospectus for that purpose taking into consideration the requirements of the SCA in this regard.
• There is no longer a minimum of maximum nominal value of shares in PJSC as this will be determined in the company’s statute.
• The founders can only subscribe to the percentage of shares allocated for them in the prospectus (without any minimum or maximum percentage set by law for this purpose).
• The board of directors of PJSCs are required to fill a vacant board position within a maximum period of 30 days provided that such appointment is submitted for approval to the general assembly during its first meeting after the date of such appointment. In the event that a new member is not appointed in the vacant position during the above 30 days, the board of directors shall open the nomination period for electing a member for the vacant position at the first meeting of the general assembly, and the new member shall complete the term of his/her predecessor.
• The method of calculation of the remuneration of board of directors shall be determined in the company’s statute provided it does not exceed 10% of the net profits for the fiscal year after deducting all the depreciations and reserves. Alternatively and exceptionally and subject to the regulations of the SCA, a board member may be paid an annual fee of a maximum of AED 200,000 if the company did not achieve profits subject to the approval of the general assembly. In this case and where the company makes profits however the share of the board member is less than AED 200,000 then the board member may not be able to combine the above annual fee with the remuneration.
• Invitations to general assembly meetings will have to be sent after the approval of the SCA to all shareholders at least 21 days before the date set for the meeting and the notification of the invitation will have to take place in accordance with the methods identified by the SCA for that purpose. The above minimum notice period of 21 days for general assembly meetings can be waived by shareholders holding at least 95% of the share capital.
• In the event where the market value of the shares falls below its nominal value, the PJSC will be allowed to pass a special resolution to resolve the issuing of shares at a discount subject to SCA approval. If this happened. the company will have to create a reserve equal to the discounted amount to be covered from future profits before any other profits are distributed to the shareholders.
• It is no longer required that the majority of board members are UAE nationals instead any restrictions in this respect is left to the Council of Ministers or the SCA to decide on within the context of the strategic sectors that the Council of Ministers will identify and will decide on the minimum percentage of local partnership required for each of them.
• There is no minimum period required before a PJSC can provide contributions for purposes relating to corporate social responsibility. A company is further required, after the end of each financial year, to disclose on their website whether or not they made any contribution to CSR projects.

5. The Division of Joint Stock Companies

The New CCL allocated a new chapter to deal with the division / decomposition of joint stock companies. It is possible now for joint stock companies to be divided by separating the assets from the activities and related elements over two or more corporate entities according to the conditions, limitations and procedures to be issued by the Ministry of Economy or SCA.

The division can either be horizontally by having the same shareholders and share distribution on the level of the PJSC and the divided entity or vertically by allocating some assets and activities to a new fully owned subsidiary. In either case, a special resolution will have to be passed by the general assembly after obtaining a no objection from the SCA or the Ministry of Economy.  

6. The Conversion of Companies

In the event of converting a company into a PJSC, the shareholders will be able to trade their shares from the date on which the company is listed or from the date on which the company is registered in the Commercial Register if it is exempted from being listed.

Further, the requirement for a company to have achieved net operational profits of not less than 10% of the share capital in the last two financial years is removed as a condition to convert a company into a PJSC.

Expectations for 2022

The New CLL will enter into effect as of 02 January 2022. All companies in the UAE organized under the previous Federal Decree - Law No 02/2015 which was replaced by the New CCL will have a period of one year from 02 January 2022 to adjust their statuses to comply with the terns of the New CCL. This can be extended by a decision from the Council of Ministers.

All resolutions and decisions issued in relation to the Federal Decree - Law No 02/2015 will continue to apply to the extent where they do not contradict with the terms of the New CCL until they are replaced in due course by the competent authorities. Throughout 2022, businesses operating in the UAE should keep afresh of all developments introduced by the New CCL and how they may impact the processes of your company.