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The New 2013 UAE Commercial Companies Law

According to a statement issued on 28 May 2013, the amended form of the UAE Commercial Companies Law (the "New CCL") has been approved by the United Arab Emirates Federal National Council (the "FNC"). It is now extensively anticipated that the New CCL will enter into full force in the final quarter of 2013.

The New CCL amendment has been long awaited and whilst further legislative steps are needed before it comes into force, FNC endorsement marks the resolution of dazzling discussion points, a number of which have been under debate in the UAE for more than a decade. As such, this is a major step.

Although the New CCL has yet to be publicly issued, we expect that the approved form will be broadly similar to the draft that was widely circulated in April 2011. If this is the case, the New CCL is likely to fit in a number of changes to the establishment and governance of UAE joint stock companies (JSC) and limited liability companies (LLC). Particular amendments are likely to include the introduction of unified accounting standards that UAE companies must stick to, and the ability for shareholders of a limited liability company to vow or pledge their shares to third parties as security.

At the same time as we cannot be certain as to the exact form of the New CCL until it is published officially, what is clear from the FNC announcement is that provisions paving the way for the potential relaxation of current foreign ownership restrictions have been removed. It is expected (but not certain) that this relaxation has been deferred for a separate foreign investment law (the timing for which is uncertain), rather than rejected entirely. It also appears from more recent press reports that the mandatory requirement for a branch of a foreign company to appoint a national service agent has been retained.

The New CCL must now be ratified by the Supreme Council and signed by the President before publication in the UAE Federal Official Gazette. It will then go into force on the date stated in the law, which is probable to be three months from the date of publication. Consequently, it is now widely anticipated that the New CCL will enter into full force in the final quarter of 2013, although this timeframe may be subject to further change.

The 2013 Draft CCL differs from the 2011 draft of the UAE Commercial Companies Law (the 2011 Draft CCL) 1 in the following key respects:

• Foreign ownership above 49 per cent postponed for consideration in a proposed new foreign investment law. The 2011 Draft CCL permitted the UAE Federal Cabinet to issue a resolution determining the form of companies and activities or classes of activities that may be held in full by a foreign partner, or where the share of the foreign partner may exceed 49 per cent of the share capital of the company. This provision has been deleted from the 2013 Draft CCL. Based on press reports at the time the Federal National Council (FNC) was debating the 2013 Draft CCL, we understand that foreign ownership above 49 per cent will now be considered in the context of a proposed new UAE foreign investment law to be circulated later this year.

• New provision allowing “reconciliation” of certain offences prior to offences being referred to court. A new provision has been added that allows companies which have committed offences specified in Chapter 1 of Part 11 to “reconcile” for such offences before the offence is referred to court. Reconciling can be accomplished by paying an amount of money not less than double the minimum amount of the fine and not less than the amount of the fine in the case of daily fines. Article 339 further provides that if the crime is repeated within a year of the “reconciliation” or after the issuance of a court judgment, the minimum and maximum amounts of the fines shall be doubled.

Article 339 also requires the Minister or ESCA to issue regulations and procedures relating to “reconciliation”. Offences in Chapter 1 of Part 11 that may be “reconciled” include:

– Failure of a public JSC to list

– Refusal of a company to allow shareholders to inspect the minutes of general assembly

– Failure of a company to hold an annual general meeting within the specified period

– Failure of a joint stock company (JSC) to convene an extraordinary general meeting when its losses reach 50 per cent of its share capital

– Failure of a company to keep accounting records

– Failure of UAE nationals to hold at least 51 per cent of a company’s share capital

– Disposing of shares in a company in breach of the law and performance of commercial activities by representative offices of foreign companies

The introductory wording in Chapter 2 of Part 11 indicates that “reconciliation” is not permitted for the offences set out in Chapter 2 of Part 11. Offences in Chapter 2 of Part 11 that may not be “reconciled” include:

– Overvaluing non-cash contributions for shares

– Distributing profits in breach of the law

– Concealing the true financial position of a company

– Issuing shares in breach of the law

– Entering into transactions for the purposes of influencing the price of securities

• New offence: failure to keep accounting records to explain transactions. A new offence has been introduced relating to accounting records. Under Article 348 of the 2013 Draft CCL, a fine of between AED 50,000 and AED 100,000 shall be imposed on a national or foreign company that fails to keep accounting records for the company to explain its transactions.

• Provisions regulating joint venture companies deleted. The provisions in the 2011 Draft CCL relating to joint venture companies have been deleted. Apparently the FNC has taken the view that joint ventures are typically not regulated in company law statutes in other jurisdictions.

• Chairman of JSCs must be a UAE national. The 2011 Draft CCL did not require the chairman of a JSC to be a UAE national. The 2013 Draft CCL requires the chairman of a JSC to be a UAE national.

• Investment funds to have their own legal personality. New provisions have been added to address investment funds, although very briefly. Article 271 provides that investment funds shall be established in accordance with the conditions established by the Emirates Securities & Commodities Authority (ESCA) or the Central Bank in the case of investment funds licensed by the Central Bank. Article 272 provides that an investment fund shall have its own legal personality and legal form and a separate financial position.

• Council of Ministers to promote social responsibility. Article 375 of the 2013 Draft CCL is a new clause which provides that the Council of Ministers shall issue the necessary controls to motivate companies to carry out their social responsibility and its implementation phases.

• Objectives of the Commercial Companies Law specified. A new clause has been added which sets out the law’s objectives. Article 2 of the 2013 Draft CCL provides that the law aims 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.

• Government has improved director appointment right for JSCs. In the 2011 Draft CCL, the federal government or local government had the right to appoint representatives as directors pro rata to such percentage if the federal government or local government holds at least 10 per cent of the share capital of a JSC. The 2012 Draft CCL reduces the minimum holding requirement to 5 per cent for this right to apply.

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