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A Glimpse at the New Draft UAE Commercial Companies Law

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About The Author

Maxi Kussatz (Writer)

Maxi graduated from the University of Birmingham in 2013, where she studied Law and Business. Having trained with the German Legal Consultancy firm Meyer-Reumann and Partners in Abu Dhabi, Maxi is now returning to the UK to study for here LPC at University of Law Cambridge. Maxi's interests lie in EU Law, International Law, and Intellectual Property.

Most readers will be aware of the United Arab Emirates’ (UAE) significant involvement in the commercial sector, especially in relation to real estate. Although The UAE suffered great losses in the commercial sector following the economic downturn in 2007 and 2008, the country has put in great efforts to restore its once powerful position. As the world’s eighth largest oil producer and having minimal restrictions on private-sector activities, the UAE’s economy has proven to be remarkably resilient. By 2012, even the real estate market had recovered and the average house price in Dubai rose by 19 per cent, a rate of increase that is second only to Hong Kong. The IMF expects a GDP growth rate of 3.7 per cent in 2014 and 3.8 per cent in 2015.

Less than a year ago, a new UAE draft Commercial Companies Law (“the New Law”) was approved by the Federal National Council (“FNC”), which introduced some incremental reforms to the existing Law No. 8 of 1984 (“the Existing Law”). Nasser Ali Khasawneh, from The Gulf Business News, says:

Recent reports from news agencies such as Reuters has put the new UAE Commercial Companies Law back at the forefront of practitioners’ minds.

The New vs. the Old

There had been speculation as to whether the New Law would contain incentives to encourage investment in the UAE, which would include a relaxation of foreign ownership restrictions.

Whilst the New Law introduces several new notions, most of the main concepts of the Existing Law are preserved. International companies doing business in the UAE as well as any existing local companies will want to pay particular consideration to the key changes.

The New Law has set a general new tone to the country’s companies law by providing a new clause to clarify the objectives of the Commercial Companies Law. Article 2 provides that the law:

… [A]ims to contribute to the development of the business environment and the capacities of the state and its economic standing by organising companies in accordance with global variables, especially those related to organisation of governance rules and the protection of shareholders and partners, as well as supporting the flow of foreign investment and promoting the social responsibility of parties.

One of the main changes to the Commercial Companies Law aims to reinforce the existing corporate governance regime and grant superior protection for investors. The New Law will put more emphasis on examination and accountability of publicly held companies, by:

  • strengthening directors' duties and the responsibilities of managers and auditors;
  • imposing harsher penalties for offences such as misrepresentation of a company's financial position and illegal distribution of profits; and
  • the adoption of unified accounting standards.

Under Article 348 of the New Law, a novel offence relating to a company’s accounting records is introduced. A fine of between 50,000 AED (£8,518*) and 100,000 AED (£17,036*) will now be imposed on both national and foreign companies that fail to keep accounting records necessary to clarify its transactions (*at the time of writing).

It is worth mentioning that more and more parallels can be found between the UAE and UK commercial laws. This is evidence for the commercial world becoming more homogenous and increases the UAE’s potential within it.  However, discussing these parallels lies beyond the scope of this article.

The New Law also provides that the Council of Ministers shall issue the necessary controls to motivate companies to carry out their social responsibility commitments, which includes the companies’ initiative to assess and take effects on the environment and impact on social welfare (Article 375). It is probable that the New Law will offer the ability for companies to make voluntary financial contributions to safeguard corporate social responsibility goals. Furthermore, it presents the possibility for supplementary corporate social responsibility regulation to be installed by the UAE government in the future.

A requirement for a minimum number of Emirati nationals to be appointed to board positions in certain companies will also be included in the New Law and will require the chairman of a joint stock company to be a UAE national.

The FNC has decided that joint ventures shall no longer be regulated by the Companies Law and therefore, the provisions relating to joint venture companies that were proposed in the 2011 draft law have been eliminated.

Article 271 addresses briefly the establishment of investment funds. It provides that investment funds shall be established in accordance with the conditions of the Emirates Securities & Commodities Authority (ESCA) or the Central Bank. Furthermore, Article 272 provides that an investment fund shall have its own legal personality and legal form.

Formerly, all partners and shareholders who object to a merger resolution approved by the requisite majority of shareholders had the right to withdraw from the company and to recover the value of their shares. The 2013 draft law removes this right for shareholders of joint stock companies. 

Effectiveness of the New Law in relation to foreign company set up

Through media reports it seems that the New Law was in part introduced to encourage foreign investment and company set up in the UAE. The big question is, has it?

Looking back to the differences between the Current Law and the New Law, it becomes clear that most of the new provisions do not encourage foreign investment and company set up. I would go as far to say that some of the provisions even discourage set up.

Foreign investors in the UAE have eagerly awaited a revision of the Existing Law in the hope to make it more lenient in regards to foreign ownership. Currently foreign ownership of companies is set at a maximum of 49 per cent. The public hoped that a revision of the Current Law would introduce a more relaxed approach in certain industry sectors. In a previously publicised draft law, provisions for a relaxed version of the UAE public ownership policy were incorporated. These were however were rejected by the FNC on a number of grounds, including a possible threat to national security.  

Foreign ownership above 49 per cent was postponed for consideration in a proposed new foreign investment law. It has often been proposed to loosen the restrictions on foreign ownership, as this is often a deterring factor when setting up a company in the UAE. It was suggested that The UAE Federal Cabinet should issue a resolution determining the form of companies and activities or classes of activities that may be held in full by a foreign partner. Nevertheless, this provision has not found footing in the New Law. I believe that unless this is done in a timely manner, it may be possible that some investors will think twice before making the move to set up in the UAE.

Unless a genuine attempt is made to incorporate a more lax ownership regulation into the upcoming draft of the UAE Investment Law, I imagine international companies will feel less inclined to invest in the UAE and set up companies there. Alternative methods of company set up that will allow majority foreign ownership will probably become more and more popular. Possible solutions for the restricted ownership regulation are to set up in one of the UAE’s numerous free zones or the establishment of a branch or representative office of a foreign company instead of a subsidiary.

In addition to the foreign ownership regulation, the New Law states that UAE nationals must hold the majority of board seats, including the chairman of the board, of public joint stock companies. This, although on the surface protecting UAE control of foreign companies, has done more harm than it has helped. Many companies set up within the UAE are extremely specialised and it seem that they are left in a vulnerable position when board seats are filled with inexperienced and unsuitable candidates.    

Conclusion

First, it is of essence to reiterate that there are still a number of steps that must be taken before the New Draft Commercial Companies Law comes into force. Which means that there is always a possibility of the 2013 draft law being adjusted. As it stands now, the New Law is a great development of the Commercial Companies Law 1984. Nevertheless, it has not made positive progress in terms of simplification of foreign company set up. 

Industry experts and foreign companies hoped that the New Law would provide further incentives for international companies to establish within the UAE. Regrettably the reform has not been quite as extensive. It is however essential to note that the New Law is part of a set of modernizing commercial laws in the UAE. These include, a draft Bankruptcy Law, currently making its way through the legislative process and the anticipated draft Investment Law referred to above, which is due to address foreign ownership restrictions of companies incorporated in the UAE and the already enacted Competition Law.

As the UAE is looking to upgrade their market from a ‘frontier market’ to an ‘emerging market’ on the Morgan Stanley Capital Investment scale, the relaxation of foreign ownership rules, may assist the UAE in doing so. Hence, it is rather likely that the restriction on foreign ownership will be revised at some point in the future.

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Tagged: Commercial Law, Company Law, United Arab Emirates

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