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International governance: Extended grace period

18 July 2016

UAE governance: Extended grace period - read more

The timeframe in the UAE for compliance with the new Commercial Companies Law has been extended

Many limited liability companies in the United Arab Emirates were not prepared for the 30 June 2016 deadline for compliance with new Commercial Companies Law (CCL) No. 2 of 2015. They faced a daily penalty of AED 2,000 and risked dissolution.

Following requests from the Securities and Commodities Authority, the Departments of Economic Development across all the Emirates and a number of existing UAE companies, the grace period has been extended to 30 June 2017. However, private sector companies (registered in the onshore markets) should ensure they meet the new legal requirements well before this new date.

With most head offices based outside of the UAE, and no requirement for a named company secretary, or for them to be based in-country, lack of awareness and understanding played a large part in the oversight by companies to meet the original CCL deadline.

There was also some confusion as to whom the new law applies, with companies based in free-zone locations being exempt. A key requirement for companies established prior to the new law being issued is to amend their Memorandum of Association and Articles of Association in compliance with the CCL provisions, as well as to ensure that all voting rights and General Assembly procedures are clear and in line with regulations.

Key changes

There are a number of key changes introduced in the new law. First, the number of company ‘types’ has been reduced from seven to five, with the removal of joint ventures and partnerships limited with shares. The five company types are:

  • General partnership
  • Limited partnership
  • Limited liability company
  • Private joint stock company
  • Public joint stock company

For joint stock companies, there are significant changes to corporate governance and the responsibilities for the board of directors, as well as safeguarding the interests of the shareholders and the company as a whole. Penalties for non-compliance will now be enforced.

Limited liability companies, as well as private joint stock companies, can now be set up by one individual with no change to the foreign ownership rights − although this individual has to be from a Gulf Cooperation Country (GCC).

A company registrar role is being developed and is referenced in the law. The registrar will oversee the application for trade names and avoid duplication across the different Emirates. Voting regulations for board meetings and general assembly meetings are also clarified, and the sales of priority rights will now be allowed.

The new law encourages companies to list, particularly family businesses, allowing a family to retain 70% of the shares – a significant increase.

The ‘preparation of accounts’ is now a requirement: ‘[The] manager shall prepare the annual balance sheet, profit and loss account and annual report on the affairs and financial position of the company and provide recommendation on the distribution of profits’. These will have to be finalised within three months from the end of fiscal year.

Simpler LLCs

Some amendments have been made to make LLCs simpler and more attractive to investors, such as allowing a single natural or corporate person to establish an LLC and no maximum number of managers – this was previously set at five.

Also, partners representing at least 75% of share capital must now be present at general assembly meetings to constitute a quorum. The timeframe for dispatch of the invitation to convene a general assembly has been reduced from 21 days to 15 days.

Free-zone companies

These are not applicable unless: (1) specified by the relevant free zone; or (2) a free-zone company is granted permission to trade or provide service to the mainland, in which case onshore regulation should be applied.

Foreign companies

For foreign companies (branch or representative office), the agent (article 329) must be a UAE national. With regards to the branch office financial filings (article 331), the balance sheet and profit and loss account of the branch must be filed annually, together with an auditor’s report and a copy of the parent company accounts. Representative offices (article 332) are also limited to marketing purposes only and are prohibited to conduct commercial activities.

Holding companies

Holding companies are either as a joint stock company or LLC and are not permitted to conduct activities other than its subsidiaries. Permitted objects are limited to (1) holding shares or stocks of joint companies and LLCs and managing those companies; (2) providing loans, guarantees and finance to its subsidiaries; (3) acquiring the assets required to commences its group activities; and (4) acquiring certain industrial and IP rights for use by its subsidiaries.

Investment funds

Under article 272, an investment fund must have its own corporate personality and legal form and a separate financial position. There will be specific conditions and regulations which are to be established by the Securities and Commodities Authority.

What these changes mean

Amendment of the MoA and AoA

As per article 374, all companies must amend their existing Memorandum of Associations (MoAs) and Articles of Association (AoAs) to comply with the changes introduced by the new CCL.

Companies that fail to make the requisite amendments by the new deadline are deemed dissolved.

All article numbers have been changed and the new law is structured differently to its predecessor. Therefore all points of reference to article numbers will have to be updated and changed. The AoA must also now include the full name, nationality, date of birth and place of residence/domicile of each founder/shareholder.

It is expected the AED 2,000 per day fine will apply from 1 July 2017 to any company that fails to make the required amendments.

Quorum of the General Assembly

The new minimum attendance quorum of the shareholders’ assembly is 75% attendance of shareholders holding 50% of the share capital. If the quorum is not met in the first meeting a second meeting (with 14 days’ notice) attended by shareholders holding 50% of the share capital is valid.

If the quorum is not met in the first two meetings, a third meeting with a notice period of 30 days is valid with no minimum quorum requirement. The AoA must be amended to reflect this change.

Pre-emptive right

Pre-emption rights have been retained with regard to the transfer of shares in favour of the existing partners. A change in the valuation of shares in the case of a dispute has changed and this will no longer be handled by the company’s auditors but will be reviewed by experts from the authority.

Powers of managers

If the LLC’s operation and business require empowering the manager(s), or board of managers to independently execute agreements containing arbitration clauses, execute loan agreements of a tenor of more than three years, or mortgage/dispose of assets, the AoA must expressly empower the manager(s) or board of managers to do so.

As mentioned, the cap on the number of managers that can be listed has also been removed − it was previously five. A non-compete clause has now been added for company directors stating they cannot work for a competitor unless approved by the General Assembly.

Accounting standards

Article 27(3) requires LLCs to apply the International Accounting Standards and Practices.

Valuation of in-kind contributions

Article 78 allows the valuation of shares in kind to be carried out by the shareholders themselves, subject to approval of the Department of Economic Development (DED) or through a financial expert approved by DED. If the AoA includes a reference to the role of the auditors in in-kind valuations, then this reference must be amended. Any reference to specific articles of the former law must be replaced with the corresponding article(s) of the new CCL − all articles have been moved around so nothing corresponds anymore.

Rotation of auditor

All public joint stock companies must have one or more auditors nominated by the board of directors/managers and approved by the general assembly of the relevant company. In addition, the general assembly may appoint one or more auditors for one renewable year, provided that the term does not exceed three successive years (article 243). Public joint stock companies should be mindful not to breach this requirement of rotating auditors every three years.

Steps to compliance

A common reaction by companies uncertain of how to meet the first CCL compliance deadline was to wait to be told. However, companies that choose to wait for another six months, or decide to wait for their next UAE license renewal may find they have a significant fine to pay.

Every company registered in the onshore market in the UAE needs to assess their company standing in line with the new laws and ensure their entity types, governance structures and board governance meet all the necessary regulations. Most companies will have to make some changes to their Articles of Association as all article numbers pursuant to the old law have been moved and changed.

Once the company’s AoA have been updated and approved by the shareholders, they must then be signed in front of the Notary Public in the UAE − by not only the authorised signatory for the company but also their local Emirati sponsor or agent (nominee shareholder). It is important to note that documents need to be translated and approved by the notary before these can be signed and stamped − advance notice and schedule coordination is required in order to complete this essential step.

As the UAE’s Commercial Companies Law came into effect last year, it is recommended that companies now move as swiftly as possible within the extended grace period to incorporate all of the new regulations within their Memorandum, and their governance structures.

Stephanie Williams is Director of Legal and Governance at TMF Group in the GCC

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