Legal column: timely step in the right direction

The aim of the UAE government's new companies law is to boost the country's development as a centre for international commerce, according to Mojahed Al Sebae

The UAE government has issued a new law in a bid to turn the country into a hot spot for commerce.
The UAE government has issued a new law in a bid to turn the country into a hot spot for commerce.

By Mojahed Al Sebae

Following several years of discussions, considerations and preparations, the UAE’s new Commercial Companies Law No. 2 of 2015 (the New Law – all the articles referred to hereinafter are of the New Law) was issued on 25 March, 2015 and came into effect three months later (the effective date), repealing the old UAE’s Commercial Companies Law No. 8 of 1984 (the Old Law).

The UAE government intends that the New Law will help the UAE to develop into a leading centre for international commerce, by positioning it as an eminent proponent of shareholder protection, good corporate governance, and high levels of corporate and social responsibility. It aims to provide up-to-date regulations for the corporate landscape and the investment community, which will stimulate investments and protect investors.

Although the New Law maintains the cornerstones of the Old Law, it introduces some fundamental provisions that must be observed carefully by existing companies and investors, as well as by those considering setting up companies or investing in the UAE. According to Article 374, all commercial companies operating in the UAE are required to adjust their positions in compliance with the provisions of the New Law within a maximum period of one year from the effective date.

The legislator has exempted companies that are fully owned by the government, and companies operating in the oil and energy field in which the government’s share is not less than 25% of its share capital, from the provisions of the New Law. This aims to offer more flexibility to companies owned (either entirely or partially) by the UAE federal government or the local government of any of the emirates.

The New Law is also unlikely to have any major negative impact on existing joint venture arrangements, because the majority of the incorporated joint ventures are incorporated as limited liability companies.

Other updates include imprisonment penalties in certain cases, such as providing misleading information to the competent authorities, breaching confidentiality, overvaluing shares in kind, distributing profit in violation of the New Law, or concealing the true financial position of the company.

There are several new financial penalties that companies and their management need to observe. These include:

• the failure to disclose to any shareholder or partner any of the minutes of the shareholders’ meetings, the company’s records or documents;

• a chairman of a listed company failing to call for an annual general meeting within the period stipulated under the law;

• the chairman of a listed or limited liability company failing to convene a general meeting if the losses of such companies reach half of its share capital;

• a daily penalty for a business that does not amend its memorandum of association and articles of association in compliance with the provisions of the New Law within the one year period from the effective date (Article 357);

• a penalty imposed on any person who may, in bad faith, assess the value of the in-kind shares provided by the founders or the shareholders in excess of their actual value. This covers not only a possible fine but also a possible custodial sentence.

There are only a few months left before the expiry of the period granted for companies incorporated and operating under the Old Law to comply with the provisions of the New Law. The period will expire at the end of June 2016, although it could be extended if a resolution is issued by the Cabinet based on a recommendation from the UAE Minister of Economy.

Should any company fail to comply with the provisions of the New Law, that company would be considered as dissolved, in accordance with the provisions of Article 374(2).

The significant amendments made by the New Law, and the new provisions introduced relating to the legal framework governing commercial companies in the UAE, are likely to assist the New Law to achieve its objectives. However, some provisions of the New Law will not achieve their objective until all the relevant regulations, rules and resolutions required to implement the new provisions are issued by the other relevant authorities, such as the Ministry of Economy and the Authority.

In the meantime, it is extremely important for all existing companies and their shareholders and managers in the UAE to carefully review the provisions of the New Law and familiarise themselves with the various obligations it imposes, and to take all the necessary steps required to amend their memorandum of associations and articles of associations appropriately within the stipulated timeframe.

**Please note that based on a recommendation made by the UAE’s Minister of Economy, the UAE’s Cabinet has recently approved extending the one year period, which had been granted for all existing companies in the UAE to amend their status in compliance with the New Law to another year. This additional year commences on 1st of July 2016 and ends on the 30th of July 2017 and during which all existing companies in the UAE are expected to amend their status in compliance with the provisions of the New Law. Any company that fails to comply with the provisions of the New Law will be subject to the daily penalty stipulated under Article 357 (being AED 2,000) and may be considered as dissolved in accordance with the provisions of Article 374 (2).

About the author

Mojahed Al Sebae is a partner at Galadari Advocates & Legal Consultants. He has extensive experience in commercial, corporate, real estate, employment and litigation matters.

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