One of the main recent developments in the UAE business regulatory environment is the promulgation of the long-waited Commercial Companies Law No. 2 of 2015 (CCL), which is in line with the current trend in GCC region towards updating corporate laws in the region in accordance with the international best practices. Dr. Mohammed Haitham Salman, Partner at Middle East Alliance Law Firm expands on this recent development and its impact on UAE and its corporations.
Let us focus on UAE’s legislative developments regarding CLL and where you see it progressing in 2017, and the changes implemented that will help/hinder that progression.
Despite the fact that CCL came into force on June 2015, the impacts of its application cannot be recognised until June 2017 onwards as the period of the reconciliation of Statuses for the existing companies has been extended until the end of June 2017. In general, I think the application of CCL shall bring significant advancement to the business environment, as it is expected to enhance clarity and transparency (as it details the procedures and requirements of setting up companies with specific timelines) to improve the ranking of UAE in international doing business reports, and promote the competitiveness of UAE to attract targeted FDI inflows to achieve the desired economic diversification.
In addition, a number of legislative changes are in the pipeline and expected to be issued during 2017, such as: federal foreign investment law, federal arbitration law, and federal maritime law.
From a practical point of view, what changes can CCL bring to corporations in the UAE?
Well, CCL brings a number of changes as it provides, for the first time: provisions for incorporating a limited liability company owned by one party (natural or corporate); the requirements for the operation of holding companies; the requirements and procedures of mergers and acquisition, as well as the contribution of strategic partners. Furthermore, in addition to the governance measures applicable to shareholding companies to enhance the protection of the interests of the shareholders, CCL provides provisions to apply certain corporate governance in all types of companies; this requires significant changes in the duties and liabilities of the managers and partners, such as: the provision to avoid any conflict of interests for the managers; the liability of the company for the actions of its employees; each company shall have an authorised auditor; each company must have annual accounts with commitment to prepare annual financial accounts, including the balance sheet and profits and loss accounts, applying international accounting principles and standards. Each shareholder or partner in any company may obtain a copy, free of charge, of the last audited accounts and the last report made by the company’s auditor. These changes may help those seeking to conduct due diligence in relation to a UAE LLC as from now they can rely on the targeted company’s accounts.
Each manager at a limited liability company shall be liable towards the company, partners and third party for any fraudulent actions he carried out. Further, he shall be committed to compensate the company for any losses or expenses incurred thereby due to abuse of power, or violation of the provisions of any law in force or the company’s memorandum of association or his contract of appointment, or due to gross error by the manager. In this context, the most important provision for LLCs is provided under Article 84 which stipulates that the provisions related to the members of the Board of Directors at shareholding companies stipulated by CCL shall apply to managers of the limited liability companies.
What are the main challenges posed from the application of CCL?
One of the main challenges is that CCL maintains the provision related to foreign equity ownership restrictions (51% for the UAE citizens) and foreign investors who are willing to setup their own business without a UAE partner, need to operate in free zones or wait for the proposed federal foreign direct investment law to be issued.
Due to the essential changes required by CCL in the AoA or MoA and the internal regulations or bylaws of the existing companies, most of the companies do not have enough time to take the necessary steps to be aligned with the provisions of CCL and an extension for another year seems imperative.
Finally, the knowledge of the majority of business people in UAE about the requirements or the advantages of CCL is still limited which may affect the overall objectives of the law. Therefore, public seminars and workshops, articles in the newspapers, TV programs to explain the aims, advantages, changes required and the benefits to business people are really important to maximise the positive impacts of CCL.