The UAE Government has released Federal Decree Law 26/2020 (the “FDL”) which brings about significant changes to the existing UAE Federal Commercial Companies Law (Federal Law No. 2 of 2015, the “CCL”). The FDL amends/replaces 51 Articles of the CCL, amounting to the largest change to the UAE’s Federal Corporate laws since the CCL was released in 2015.
The FDL has accelerated 100% foreign ownership by abolishing foreign ownership restrictions altogether, with the exception of certain “Activities of Strategic Effect” – sensitive activities which the Ministry of Economy will announce should be kept within some degree of local ownership protection. In doing so, the FDL repeals the Foreign Direct Investment Law that was announced in 2018. This means that for companies carrying on any activity that is not named as an “Activity of Strategic Effect”, foreign investors should be permitted to take 100% ownership. This is a very welcome more for the foreign investor community and is expected to generate significant further inbound investment into the UAE.
The FDL has also increased the cap on shares a company can float on one of the UAE’s stock markets from 30% up to 70%. Other changes include amending the scope and nature of directors duties, how to convene shareholder meetings, managing disputes with directors and shareholders, enabling recapitalisation of companies in financial distress.
These changes will be the subject of a lot of debate and clarification in the coming months.
The main changes introduced are as follows.
Foreign ownership restrictions will be significantly relaxed
The FDI Law of 2018 has been repealed. The FDI Law announced a “Positive List” of 122 economic activities, where companies that carried out those activities could be owned up to 100% by foreign investors. The FDI Law also introduced a list of activities which were not available for foreign ownership (the “Negative List”), but there were also a lot of activities that didn’t appear on either of those lists – those activities were informally referred to as the “Grey List”. This resulted in some companies being open for enhanced foreign investment, some not, and some which were unclear.
Under the FDL, in place of the FDI Law, the Ministry of Economy will set out a list of “Activities of Strategic Effect” (“ASE”) at some point in future, which we speculate might be similar to the Negative List. If a company’s activities include any on the ASE list, then there will be some foreign ownership restrictions which will continue to apply to those companies – what those restrictions are will be announced at a later date. However, if a company’s activities do not comprise an ASE, then there is no restriction on that company being owned 100% by foreign investors.
Similarly, a single foreign investor (natural or corporate) can own 100% of an onshore LLC (subject to the above) as a single shareholder company. Previously the CCL required the shareholder of a single shareholder company to be a UAE national or corporate. Also, Article 329 of the CCL will be repealed, allowing foreign companies to establish branch offices onshore in the UAE without requiring a local national sponsor/agent.
These changes relating to foreign ownership restrictions will come into force at the end of March 2021.
Joint stock companies / fund structures
A restriction that only joint stock companies can invest money for the account of third parties has been deleted. This should enable a broader range of structures to be used for investment funds and similar. We note that additional regulations are expected to be introduced in due course which will create a more flexible and sophisticated regulatory environment for investment funds based onshore in the UAE.
Company Memorandum of Association – dispute resolution
A company’s Memorandum of Association must now provide a mechanism to settle disputes that may arise with its directors or shareholders. It is unclear at this stage whether this will permit the shareholders to decide the forum for disputes – e.g. will alternative dispute resolution mechanisms be permitted or will Federal Courts be mandatory. We expect this point to be clarified in due course in discussion with local Notaries.
Procedures for shareholders’ meeting
The procedures for shareholders’ meetings have been updated giving minority shareholders greater rights, recognising that meetings can be attended virtually, and speeding up the process for obtaining a quorum.
Calling a shareholders meeting can now be forced by a shareholder holding only 10% of the shares in the LLC, rather than minimum 25% previously.
A shareholder meeting now requires 21 days’ notice (previously 15) and the notice must also be sent to the relevant Emirate’s Department of Economic Development prior to it being sent to shareholders. The notice must now contain full details of what will be considered at the meeting, time/location, quorum requirements and proxy and adjournment protocols. Recognising the COVID-19 impact on attending meetings in person, the FDL now also expressly recognises the ability to hold/attend shareholder meetings by “modern technology methods” – Teams/Zoom etc.
A quorum for a shareholders meeting will be met by shareholders representing 50% of the LLC’s share capital (previously 75%) unless a high threshold is specified in the Memorandum of Association. Where the first meeting is not quorate, an adjourned meeting shall be deemed quorate provided any shareholder attends regardless of % held, unless a different %/requirement is specified in the Memorandum of Association. This does away with the interim adjournment requirement in the CCL (former art 96(2), now deleted) making the convening of shareholders’ meetings a quicker process.
Recapitalising companies in financial distress
Companies in financial distress can now apply to the Court for an order to increase its share capital where an injection of equity is required to save the company. The alternative requires 75% shareholder approval and applications via Notary/DED etc, which can take time and are not always guaranteed to be approved, so this is a welcome step offering companies in need an additional route to recapitalise.
Updated scope of directors duties
(Please refer to our note on Directors Duties here) The scope of directors’ duties has been extended to specifically also apply to “members of the Executive Management” – which should now therefore also cover the General Manager, any Executive Directors, the CEO and anyone “occupying an executive-level position”, plus those who have been appointed personally by the Board of Directors (which we assume covers alternates/proxies and potentially also any committee members).
Previously directors could be liable for “an error in management”. This caused a lot of concern given how vague and subjective that is. Helpfully, the FDL has deleted this phrase, so the liability now relates to acts of fraud, misuse of power, violation of the CCL (as amended) or Articles of the company.
As a new provision, now, any director/executive manager found guilty of being in breach of their duties, including concluding any transactions involving a conflict of interest, shall be removed from the board and shall be disqualified from holding any directorship/management positions in other companies in the UAE for a period of 3 years.
Related Party Transactions
Provisions around approval of related party transactions have been enhanced (for PJSCs and LLCs), where the “related party” must disclose to the Board the nature of his/her conflict and the Chairman must report to the “Authority” (the SCA for listed companies, or DED for LLCs) full details of the transaction and how in their opinion the terms & conditions are fair, reasonable and beneficial to the company’s shareholders.
Direct shareholder claim
New Article 166 now makes it easier for shareholders to bring claims against the Board or Executive Management where they feel their actions have resulted in direct damage to the Shareholder. Shareholders don’t first need to see if the Company will file a claim, although they are not permitted to bring a claim which could be regarded as vexatious, for the sake of defamation or extortion or to affect the company’s share price.
Similarly, new Article 166 (bis) 1 also makes it easier for shareholder to being claims on behalf of the Company against a Related Party, provided the shareholder holds at least 10% of the shares in the company and the Board of the Company has either refused to bring the claim in the name of the Company, or has failed to respond to the Shareholder’s request.
The provisions relating to listed PJSC have also been updated.
Previously the Chairman and a majority of the board of PJSCs needed to be UAE Nationals. The FDL envisages this requirement to be relaxed by a decision of the Cabinet or DED/MOE;
Previously companies listed on UAE stock exchanges (ADX/DFM) could only offer 30% of their share capital for subscription – this has now been increased to 70% in order to promote a more fluid capital market in the UAE (or potentially more than 70% with approval of the SCA);
Founders will be “locked in” for a period of 6 months after listing, meaning they cannot dispose of their shares during that time;
On Takeovers, the CCL now specifically recognises the “squeeze out” procedures that the SCA has set out in its Takeover Code and added additional penalties of a fine of between AED100k and AED10million for any violations; and
Listed companies can now, by special resolution, issue shares in their capital to sellers of a target the listed company wishes to acquire, where such share consideration would fall outside of the pre-emption rights in the CCL.
The FDL comes into force on 2 Jan 2021 and all companies have 1 year, until 2 January 2022, to update their constitutional documents to align with the new law.
The foreign ownership restriction changes (articles 10, 151 and 329 of the CCL) shall take effect in 6 months’ time from the date of publication in the Gazette. The Gazette states an effective date of 30 September, so the timeline for these changes could be as soon as 30 March 2021, although we expect that, similar to the FDI Law, implementation of those changes may take some more time and may be implemented on an Emirate-by-Emirate basis.