A new commercial companies law (“New CC Law”) was issued in the United Arab Emirates (“UAE”) on 1 April 2015 and will come into effect within the next three months. The New CC Law applies to companies established in the UAE and to some foreign companies conducting business in the UAE. It is likely that the New CC Law will have the greatest impact on public joint stock companies (“Public JSCs”), limited liability companies (“LLCs”) and initial public offerings (“IPOs”) on the Dubai Financial Market and the Abu Dhabi Securities Exchange.

The New CC Law will not apply to:

• government entities or companies fully owned by the UAE federal government or the government of one of the seven Emirates;
• companies exempted by a federal law or cabinet resolution;
• companies operating within the oil, gas, energy, power, water or similar sectors where at least 25% of such companies are government owned (directly or indirectly); or
• free zone entities where the regulations of the free zone in which they are established exclude the applicability of the New CC Law (although the New CC Law remains applicable where a free zone entity is permitted to conduct business onshore).

Public JSCs

IPOs

Whilst Public JSCs were previously required to offer a minimum of 55% and maximum of 80% of their shares to the public upon undertaking an IPO, these thresholds have now been relaxed such that they can now offer a minimum of 30% and a maximum of 70% of their shares to the public. In addition, upon conversion of a company to a Public JSC, up to 30% of a company’s existing share capital may be offered to the public. These changes will allow the founders of a Public JSC to exercise more control after a listing and will permit investment by strategic partners.

In addition, there is no longer a requirement to issue new shares at the time of IPO. Public JSCs may now offer existing shares to the public. Importantly, prices will be able to be established in accordance with investor demand through a book-building process as opposed to a pre-established valuation method, thus giving full effect to existing book-building regulations.

The New CC Law provides Public JSCs with more flexibility in raising capital and enables pre-emption rights to be traded by shareholders or waived by a special resolution of the shareholders.

Takeovers

The New CC Law suggests that a code on takeovers will be issued to introduce a regulatory takeover regime and streamline the process of bidding for shares in public companies. We will be monitoring developments in this regard and will issue an alert as and when an update becomes available.

Financial Assistance

The New CC Law prohibits the provision of financial assistance to shareholders. A Public JSC or any of its subsidiaries can no longer provide financial assistance in the form of pardoning debts, providing of loans, gifts or security or delivering any other financial assistance to allow a shareholder to acquire shares in the Public JSC. This is in line with international best practice. It remains to be seen if a ‘whitewash’ or other similar procedure permitted by certain jurisdictions will be set out in future implementing regulations.

LLCs

Foreign Ownership

There was much anticipation that the New CC Law may enable non-UAE shareholders to own a majority stake in an LLC. This is not the case. However, it has been reported that a new Foreign Direct Investment Law will allow non-UAE shareholders to own 100% of an onshore LLC in certain sectors. There has been no indication of applicable sectors or when such a law would be published. Again, we will be monitoring developments in this regard.

Shareholders

Whereas 2 to 50 shareholders were previously required to form an LLC, the number of shareholders required is now 1 to 75. Whilst this could lead to more LLCs being formed by single shareholders, the two shareholder model is likely to prevail for foreign investor shareholders as 51% of the shares of an LLC must still ultimately be owned by a UAE shareholder.

Share Pledges

Prior to the issue of the New CC Law, share pledges over shares in an LLC were generally not recognised in the UAE. The New CC Law provides for the creation of share pledges over shares in an LLC and this is likely to play an important role in the future financing of LLCs.

New Structures and Entities for LLCs and Joint Stock Companies

The New CC Law provides for the concepts of holding companies and common investment companies. Holding companies will establish and control subsidiaries and can take the form of either an LLC or a joint stock company. The activities of a holding company will be limited to holding shares in other LLCs and joint stock companies, acquiring assets necessary for its business, holding intellectual property rights to license to its subsidiaries and providing management services and financing to its subsidiaries. A holding company may only conduct trading activities through its subsidiaries.

Conclusion

The New CC Law has introduced several improvements to the existing commercial companies law in an effort to modernize the legal framework governing commercial companies in the UAE. It introduces new concepts and relaxes some existing rules such as offering a potentially easier route to IPOs which is seen as part of a wider initiative to improve and strengthen the UAE’s economy. That said, there remain a number of areas where further complementing laws and implementing regulations are necessary in order for the UAE’s corporate law and regime to become more aligned with international standards.