To celebrate the United Arab Emirates’ 50th anniversary, the country has implemented a wide-ranging package of legislative reform. A central theme to this reform has been strengthening and promoting the UAE as a jurisdiction for foreign direct investment and commerce.
One of the key pieces of legislative change has been the introduction of Federal Law No. 32 of 2021 on Commercial Companies (the “New Companies Law”). This replaces Federal Law No. 2 of 2015 (the “Old Companies Law”) in its entirety and codifies certain amendments made to the Old Companies Law in recent years.
The New Companies Law came into legal effect on 2 January 2022. All companies have a period of one year to comply with the changes it introduced. During this transitional period, all companies should assess the impact of the New Companies Law, update their constitutional documents and ensure they are fully compliant by 2 January 2023.
Below we set out ten of the key changes in the New Companies Law:
- Special Acquisition Companies (“SPACs”)SPACs have grown in popularity over recent years, particularly in the USA, as vehicles to raise capital via a public listing for the purpose of making acquisitions or strategic mergers. SPACs have now been given a legislative basis in the UAE. The New Companies Law defines these as a public joint stock company (“PJSC”) that the Securities and Commodities Authority (“SCA”) has approved for the sole purpose of acquiring or merging companies. SPACs are recognised by the New Companies Law but are also exempt from the law itself, and are subject to separate regulations which were issued by the SCA earlier this year.
- Special Purpose Vehicles (“SPVs”)The New Companies Law also recognises onshore special purpose vehicles for the first time. SPVs are companies established with the purpose of separating the obligations and assets associated with a particular financing operation from the obligations and assets of the person who incorporated it, for credit operations, borrowing, securitisation, issuance of bonds, and transfer of risks associated with insurance, reinsurance and derivatives operations. Much like SPACs, SPVs are recognised by the New Companies Law but will be governed by separate regulations to be issued by the SCA. It is anticipated that the introduction of SPACs and SPVs will stimulate transactions in the corporate and financing sectors by allowing greater flexibility in structuring and aligning the UAE with structures available to investors and financiers in other developed legal jurisdictions.
- Foreign InvestmentThe most significant change to the Old Companies Law was introduced in 2020 by Federal Law No. 26 of 2020. This abolished the requirement for a minimum 51% UAE shareholding in onshore entities, with the exception of certain “Activities of Strategic Effect”.The New Companies Law restates the principles introduced in 2020, so does not introduce anything new, but it codifies and confirms these changes as being a core principle of the New Companies Law. This should be seen as a welcome development for new and existing foreign investors.Please see our prior Law-Now on the relaxation of foreign ownership in 2020.
- LLCs – Reduced Statutory Reserve ContributionsThe percentage of net profits which a limited liability company (“LLC”) is required to set aside each year for the purposes of its statutory reserve has been reduced from 10% to 5%. The shareholders may decide to stop funding the statutory reserve when it reaches a value equal to half of the company’s share capital.
- LLCs – Renewal of Managers upon Expiry of Appointment TermThe management of an LLC is undertaken by one or more managers. The New Companies Law provides that if the term of appointment of the managers expires, and the board of managers has not been reformed, the existing board of managers shall continue to run the company for a period of up to six months. The shareholders are required to appoint new managers on or before the expiry of the six-month period, failing which managers may be appointed by the relevant competent authority having jurisdiction over the company.
- LLCs – Relaxed Quorum Requirements for Reconvened Shareholder MeetingsWhere an initial meeting of the shareholders is deemed inquorate, the reconvened meeting must be held no less than five and no more than 15 days after the initial meeting. The reconvened meeting will now be deemed quorate irrespective of the number of shareholders attending. This rule is now mandatory and will apply even where the LLC’s memorandum of association provides otherwise.
- PJSCs – Caps on Founders’ SubscriptionsUnder the Old Companies Law, founders’ subscription shares on an IPO were subject to minimum (30%) and maximum (70%) caps on the shares they could subscribe for through the public offering. These mandatory caps have now been removed. Founders can now subscribe for shares within the percentages specified in the prospectus, subject to any requirements specified by the SCA.
- PJSCs – Extended Public Subscription PeriodsThe period for the subscription of shares in a public offering was previously set at 10 working days. The New Companies Law now allows subscriptions to remain open for a period to be specified in the offering prospectus, provided this does not exceed 30 working days. If all of the shares are not subscribed for within the specified period, an application can be made to the SCA to extend the public subscription further. Any unsubscribed shares left at the end of the subscription period can be subscribed for by the founders.
- PJSCs – Issuing Shares at a Discount PJSCs can now issue shares at a discount to the nominal value if the market value is lower than the nominal value. This is subject to SCA approval being obtained and the company establishing a special reserve equal to the discount amount and funding this shortfall through future profits in priority to the distribution of dividends.
- PJSCs – Removal of caps on nominal value of SharesThe New Companies Law removed prior restrictions that the nominal value of shares in a PJSC must be between AED 1 and AED 100.
If you would like to discuss any changes introduced by the New Companies Law and how they impact your business, please reach out to us.