UAE Commercial Company Law and Legal Reforms - General Rules
Federal Law No. 2 of 2015 “The New Commercial Company law” (CCL), which came into force on July 1, 2015, replaced the Federal Law No. 8 of 1984. The purpose of the new legislation was to bringing the UAE up to speed with corporate legislation currently enacted in many developed nations.
The New CCL requires that corporations subject to the legislation amend their articles of association and memoranda to comply with the legislations new provision. Failure to amend a corporation’s articles of association before June 30, 2016 will result in the dissolution of the company.
The purpose of this article is to highlight certain changes and new additions enacted by the new legislation, and what corporations and shareholders need to know.
Applicability and scope of the New Commercial Company Law
The scope of the new legislation covers a variety of areas of ownership and corporate governance for different company models concerning the protection of shareholders, and fiduciary duties of directors.
Although the CCL suggests that it applies to all commercial companies, the CCL is not applicable to free zone companies (Article 5 of the CCL). Article 5 of the CCL will only apply to free zone companies if they operate outside of their designated areas.
Furthermore, Article 4 stipulates that certain companies are excluded from application of the new CCL. These companies include
(1) Companies that the federal cabinet had specifically exempted from application due to resolution;
(2) Companies that are wholly or partially owned by the federal or local government; and
(3) Companies which the federal or local government owns 25% or more and operate in the oil, gas, and power sectors.
Foreign ownership: Restrictions codified
The UAE provides a system ownership of where foreign ownership is restricted to 49%, and the remaining 51% is required to be owned by an Emirati national. With the new CCL, Article 10(1) provides that the restrictions are strictly observed, as any share transfers to foreign nationals greater than 51% will be invalidated. With the original CCL, this provision did not exist.
Fiduciary duties (the duties of Directors and Managers)
Fiduciary duty can be defined as a duty owed by an agent to a principal. For a corporation or business entity that is an independent person, directors and managers owe a fiduciary duty to the corporation. Corporate laws of jurisdictions of developed nations impose a duty of ordinary care and prudence on a director and manager. Article 22 of the New CCL imposes the duty for directors to act with the care of a “precise person.” Prior to the New CCL, fiduciary duties of directors and managers had not been codified.
In its attempts to protect corporations, Article 24 of the new CCL provides that all provisions exempting directors and managers from personal liability are void.
A form of a duty not to compete has been enacted in Article 86 of the New CCL, which applies specifically to limited liability companies. Article 86 stipulates that a director of a company is not allowed to manage or govern another company unless it obtains the consent of the company for which she is already a director.
Updated Accounting Requirements
The Enron crisis is considered the event which highlighted the importance of the role of accountants. As a reaction, legislation in developed nations, such as Sarbannes-Oxley, set into force accounting requirements that many countries now adhere to.
In the UAE, accounting requirements were already in force prior to the New CCL. However, the New CCL brings accounting requirements up to international standards. Article 26 of the New CCL stipulates that business entities subject to the new legislation are required to retain accounts of books at their relevant head offices for five years. The aim is to give shareholders and directors an accounting of profit and loss for a given period.
Introduction of Holding Companies into UAE legislation
Although “groups” exist in the Emirates, Article 266 of the new CCL legally recognizes the existence of holding companies in the UAE. The existence of holding companies allows them to perform business activities through their subsidiaries.
ABOUT THE AUTHOR: Karbal & Co
Karbal & Co is an international law firm with offices in Dubai, United Arab Emirates and Tripoli, Libya. Our corporate law practice advises clients on all ownership, corporate governance and regulatory matters.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.