New UAE Commercial Companies Law: A Move Towards Global Standards

New UAE Commercial Companies Law: A Move Towards Global Standards


On 1 April 2015, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, President of the United Arab Emirates, enacted Federal Law No 2 of 2015 (the Commercial Companies Law, or Law). The Law brings to a close several years of speculation regarding anticipated changes to Federal Law No 8 of 1984 Regarding Commercial Companies, as amended (the Commercial Companies Law of 1984).

The Commercial Companies Law introduces very specific, strategic modifications, designed to modernise the regulation of UAE commercial activities in line with UAE Vision 2021. This article gives an overview of the principal changes to corporate and commercial legislation in the Law.

Changes to LLC Ownership Requirements The Commercial Companies Law will allow the establishment of limited liability companies (LLCs) by a sole legal person.

Previously, under the Commercial Companies Law of 1984, the establishment of an LLC required a minimum of two legal persons. An individual seeking to establish a business alone could only establish a sole proprietorship, an arrangement which did not provide the protections of limited liability, or establish an LLC in certain free zones, which restricted business activities to within the free zone area.

The ability to incorporate an LLC with one shareholder means that sole actors will enjoy the benefit of limited liability in their business ventures. At this time, the change will primarily benefit Emirati and other Gulf Cooperation Council (GCC) entrepreneurs seeking to establish ventures in the UAE, given the limitation on foreign ownership. These limitations are still under consideration, as discussed below.

Several other changes to the operation of LLCs are introduced by the Commercial Companies Law. The Law has removed the cap on the number of managers appointed to an LLC, currently set at five. Furthermore, a manager of an LLC may not, without the consent of the general assembly of the LLC, operate any business in competition with the business of the company in question.

The Commercial Companies Law has reduced the required notice period for general assemblies from 21 days to 15 days, or less with the agreement of all partners. The minimum attendance to achieve a quorum for a general assembly of an LLC has been increased from a minimum of 50 per cent of all partners to 75 per cent. If a quorum is not present at the first meeting, a second meeting is to be called to be held within 14 days of the first meeting, at which the minimum attendance to achieve a quorum shall be partners owning 50 per cent of the capital of the company. If a quorum is not achieved at the second meeting, a third meeting shall be called to be held 30 days after the second meeting, which shall be valid regardless of the number partners attending.

As previously, for a resolution at the general assembly of an LLC to be valid, it must be passed by partners owning a simple majority of capital of the LLC. Amendments to the articles of a company will require the approval of partners owning a minimum of 75 per cent of the capital of the company, unless the articles of association specify a greater majority.

Regulation of Listed Companies The Commercial Companies Law includes several changes to the regulation of listed companies.

The minimum float requirement on UAE exchanges is reduced. Under the Commercial Companies Law of 1984, listing companies were required to float at a minimum 55 per cent of company equity. The new Law has lowered that requirement to a minimum of 30 per cent of company equity. This change will bring the UAE minimum float requirement in line with the minimum required by many of the world’s strongest exchanges.

Furthermore, the Commercial Companies Law introduces the practice of underwriting to the UAE capital markets: the practice of underwriting was previously prohibited. This change will permit companies to price shares by book-building or relying on indicative bids from investment fund managers, as is commonly done in other capital market regimes. Previously, listed companies were required to rely on fixed price evaluations.

Listed companies will also be permitted to convert debt to equity, a practice which was not expressly permitted under the previous legislative regime. A listed company will be able to increase its capital by converting cash debt into equity, upon the presentation of a study by the board of directors to the general assembly indicating the necessity of such a step, and the passing of a special resolution approving the process.

Regulatory Bodies The Commercial Companies Law will alter the way that public companies in the UAE interact with regulatory bodies.

The regulation of private companies will continue to require cooperation between the Ministry of Economy regarding matters within the federal domain, and each emirate’s department of economic development regarding matters within the local domain of the relevant emirate. However, most authority for the licensing and regulation of publicly listed companies will be handed over to the Emirates Securities and Commodities Authority (ESCA). ESCA will have jurisdiction over public companies, with the exception of matters relating to trade names and activity licensing, which will continue to require cooperation with the Ministry of Economy and the local department of economic development.

Corporate Governance and Transparency The Commercial Companies Law introduces stricter regulations for the accounting practices and auditing procedures, applicable to all companies. The intention is to bring UAE corporate practice up to international standards of accountability and transparency.

For example, article 26 of the Law requires all companies, including LLCs, to keep accounting records showing its transactions. The aim is to accurately reveal at any time the financial position of the company and enable the partners or shareholders to confirm that the accounts of the company are properly kept in accordance with the provisions of the Law. Accounting books must be kept at the company’s head office for at least five years from the end of the financial year to which they relate.

Article 27 of the Law requires all joint stock companies and LLCs, with the exception of joint venture companies, to have one or more auditors to audit the accounts of the company every year. All companies must prepare annual financial accounts, including the balance sheet and the profit and loss account applying the International Accounting Standards (as set by the International Accounting Standards Council). Any partner or shareholder in a company may obtain, without charge, a copy of the last audited accounts, the last audited report and a copy of the accounts of the group if it is a holding company, upon written request. The company must respond to such a written request within 10 days.

The Commercial Companies Law also introduces corporate governance requirements for private and public joint stock companies, providing that Ministerial resolutions shall be passed introducing the framework that will regulate the corporate governance of private joint stock companies with more than 75 shareholders. The Chairman of ESCA is required to issue the applicable corporate governance regulations for public joint stock companies.

Share Pledges The Commercial Companies Law of 1984 does not address taking security by way of share pledge. Accordingly, to date, there has been no procedure for pledging the shares of an LLC in the UAE. As a further complication, LLCs have not been regarded as having shares to pledge, but rather, partners in an LLC hold quotas or units in an LLC, and certificates of ownership akin to share certificates have not been issued to partners.

The Law introduces a procedure for perfecting security by way of share pledge over shares in an LLC. Under the Law, a partner may transfer or pledge shares in the company to another party or to a third party, provided the transaction is made in accordance with the terms of the company’s articles of association, by way of a legally binding document, notarially executed and registered in the commercial register of the department of economic development of the relevant emirate.

Companies wishing to enable shareholders to offer security by way of a share pledge will need to amend their articles of association to authorise this. Where a partner wishes to transfer a share to a third party, pre-emption rules will apply. Thus, a partner seeking to transfer his share to a third party, with or without consideration, must notify the other partners, through the manager of the company, of the details of the proposed transferee and the terms of the transfer. The manager shall notify the other partners of these details immediately upon receiving notice. Every partner may demand to pre-empt the share within 30 days from the date on which the manager first received notice of the agreed price. In the event of dispute on price, such price shall be assessed by one or more technical experts, as nominated by the local department of economic development, on demand by the applicant for pre-emption and at his cost. Where a right of pre-emption is exercised by more than one partner, shares offered for sale are to be divided among partners pro rata to their respective shareholdings. Upon expiry of the statutory period, without pre-emption, the relevant partner may dispose of the shares to the third party.

The Law also includes related regulations on the enforcement of share pledges. Where a partner commences execution proceedings against the share of its debtor, the partner shall agree the terms of sale with the debtor and the company. Failing agreement, the share(s) shall be offered for sale at public auction, with the company retaining the right to recover the sold share(s) upon the same terms as awarded at auction within 15 days from the date of the auction. It remains to be seen how in practice these provisions will benefit, for example, shareholders wanting to facilitate corporate finance by pledging shares to a third party. The Law does not introduce the concept of a certificate of share ownership, as is commonly used in other jurisdictions when a proof of ownership is required for the registration of share pledge. It is likely that a competent authority will rely on the register of partners of the company which, under the new Commercial Companies Law, must be kept up to date and the particulars of which must be lodged with the local department of economic development in January of each year.

No Changes to Restriction on Foreign Ownership Despite earlier speculation, the Commercial Companies Law does not change restrictions on foreign ownership of onshore companies, which remains at a maximum of 49 per cent. Not less than 51 per cent must be Emirati-owned. Complete foreign ownership of a company remains restricted to free zone entities for the time being. However, at the UAE Annual Investment Meeting held in Dubai on 30 March 2015, His Excellency Sultan Al Mansoori, UAE Minister of Economy, reiterated the government’s intention to enact a new law that would relax such foreign ownership restrictions in certain, as yet unspecified, industry sectors. To date, no timeline has been declared for the introduction of the proposed law.

Similarly, the new Commercial Companies Law will have little effect on the regulation of branches of foreign companies or representative offices, both of which still require local sponsorship for establishment and operation. However, branch offices of foreign companies which have, to date, been prevented from engaging in trade and whose activities have been limited to promoting and representing the businesses of their foreign mother entity, may now, upon fulfilment of certain limited criteria, be granted the right to trade from the Ministry of Economy and the local department of economic development.

Timeline to Enforcement Article 378 of the new Commercial Companies Law sets the date for enforcement at three months from the date of publication in the Official Gazette, as is customary for new laws. Assuming the effective date is not postponed, then these provisions will come into effect at the start of July 2015.

Share this article

Expert Advice

Book a call with one of our company formation specialists.

Please enter a message

Meet the Pro Partner Group team,
a vastly skilled and experienced UAE team