After nine years of media speculation, the UAE Commercial Companies law, the first major overhaul of the legislation since 1984, is expected to come into force soon. This article identifies the primary changes we will see now that the new law has arrived.
Despite much public discussion and speculation to the contrary, the law applies a conservative approach to foreign investment and retains the same legal ownership restrictions in evidence under the existing law. So foreign investors are still limited to 49 per cent ownership of UAE companies. Any future liberalisation will be addressed in a new UAE Foreign Investment Law, foreshadowed for a future time but so far not unveiled.
One interesting provision permits free zone companies to operate “onshore” from their free zone base premises (subject to the promulgation of a regulating Cabinet decree), but this seems to do more than validate a common business practice which is anyway now tolerated.
The most significant impact of the new law is to provide additional encouragement to UAE companies to list on local financial markets.
The first measure which will encourage new listings is the reduction in the free float requirement from 55 to 30 per cent. The change allows these families to list their businesses yet retain 70 per cent control.
The second encouragement is the fact that the new law allows the sell-downs of founding shareholding as part of the IPO process. While this is an important reform, it is must be noted that once the company lists, any founders’ holdings which have not sold down during the initial offering phase remain locked in for two years.
Thirdly, the new law creates a framework for introducing refined bookbuilding rules as a market pricing mechanism of UAE IPOs. This means that pricing will be aligned more closely to market rather than regulator-approved valuations.
Fourthly, for the first time the law puts in place a framework for underwriting, a facility which provides greater comfort for issues.
At the same time, the law introduces certain elements of modernisation and reform. For example, the law:
• Permits public joint stock companies to make “strategic” share placements without having to run the gauntlet of their shareholders’ pre-emptive rights, thus facilitating the formation of important strategic alliances by UAE public companies;
• Allows for sole-shareholder companies, either in the form of limited liability companies (“LLC”) or private joint stock companies (“PJSC”). It has not been possible, other than in some free zones, to establish an LLC owned by one individual or entity.
• Enables shareholders in public joint stock companies to sell their preemption rights (rights issue);
• Enables shares in LLCs to be pledged as security to financiers. This will enhance the opportunity for banks to take security over shares in limited liability companies;
• Permits more than five individuals to serve as board members of limited liability companies, enabling large closely held companies to broaden their director skill base and business network.
• Prohibits joint stock companies from providing financial assistance to fund the acquisition of their own shares (in line with the international market practice);
• Facilitates the introduction of employees’ incentive share schemes.
However, there are a number of useful reforms which could have been made in the new law which have not been made.
Liberalisation of foreign investment rules
Under the new law any foreign investor can own a maximum of 49 per cent of locally incorporated company, apart from companies incorporated in a free zone in which they can own 100 per cent. Where a public joint stock company lists, there is not a 51 per cent UAE ownership required, but there is a 51 per cent GCC requirement. Yet even though majority GCC ownership is permitted, the law imposes a mandatory requirement that the chairman and majority of directors of any public joint stock company must be UAE nationals.
Specific needs of family businesses have not been addressed in the law. One problem which UAE family businesses face is that all shares in all onshore companies must have equal voting rights. When combined with the operation of the UAE inheritance laws (which pre-ordain a formula for distribution of inherited assets), there is limited flexibility for tailoring arrangements which ensure that the heirs with the necessary commitment to and aptitude for the business are the ones entrusted with stewardship to drive the decision-making process of the business. Family businesses should be able to create different classes of voting and non-voting shares so all heirs can share the economic benefit, but not necessarily interfere in the decision-making for the business.
Abolition of statutory pre-emptive rights in Limited Liability Companies
Under the old companies law, every shareholder in an LLC company has statutory right of pre-emption over all the other shares and this continues under the new law. Regrettably, this mandatory and cumbersome statutory right has carried forward into the new law.
In conclusion, the law is a definite improvement on the 1984 law, but the changes are less sweeping than many would have expected after a decade’s work. Its main impact is to encourage new listings of UAE companies on financial markets — but in more day-to-day matters, it is largely business as usual in the UAE.
Essam Al Tamimi is a senior partner at the law firm Al Tamimi & Co.
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