New UAE Commercial Companies Law: What you need to know

6 minute read
03 February 2022

What and Why? As part of the UAE Government's major legal reforms (part of the Government's wider "towards the next 50" project) during the 50th anniversary of the UAE, Federal Law by Decree No. 32 of 2021 concerning commercial companies (the "New Law") was announced on 20th September 2021. The New Law repeals the previous commercial companies law, being Federal Law No. 2 of 2015 (and its amendments) (the "Old Law"). The New Law puts emphasis on foreign investment and ownership, new corporate vehicles and general corporate governance matters, all aimed at creating a more investor-friendly business environment.

When?  The New law is effective as of 2 January 2022.



Foreign ownership

The New Law codifies the changes in foreign ownership in the UAE (as introduced in 2020 as amendments to the Old Law), allowing for 100% foreign ownership for certain businesses. Each of the relevant Abu Dhabi and Dubai economic departments has published a list of activities permitted for 100% foreign ownership, but with certain strategic sectors retaining ownership restrictions.

We expect this to increase M&A activity and, more generally, foreign investment in the UAE in 2022, with foreign investors (e.g. private equity and private investors/business, whether established or new to the UAE) being able to have full control (without any of the previously associated risks) of their acquisitions in the UAE mainland. We are already seeing this in sectors such as healthcare, FinTech, education and hospitality, where M&A activity appears to be buoyant.

Introduction of new corporate vehicles

The New Law introduces the concept of Special Purpose Vehicles (SPVs) for onshore UAE businesses. This will allow a parent entity to separate its assets and liabilities from specific transactional matters and associated risk. SPVs will however be subject to the regulations issued by the UAE Securities and Commodities Authority (SCA) and not the New Law.

Special Purpose Acquisition Companies (SPACs) are also introduced under the New Law (as a Public Joint Stock Company (PJSC)). SPACs are 'shell' companies incorporated for the purpose of listing on a stock exchange and raising capital, with their objectives being to acquire assets (usually shares in private companies). As with SPVs, SPACs are exempt from the requirements of the New Law but governed by regulations issued by the SCA.

The introduction of SPVs and SPACs follows an exploding international popularity of investment-friendly acquisition vehicles that encourage corporate/transactional activity in both private and public forums and this aligns the UAE with other internationally recognised markets in this regard.

Corporate governance

(a)Limited Liability Companies (LLCs)

Some limited corporate governance changes, in connection with LLCs, have also been introduced by the New Law. These include:

  1. A reconvened General Assembly meeting will be quorate irrespective of the number of shareholders attending (even where the LLC's Memorandum of Association states otherwise).
  2. A method of dispute resolution between shareholders, managers and directors must now be included in the LLC's Memorandum of Association.
  3. A reduction in the required statutory reserve - reduced from 10% to 5% of net profits (with such deduction disapplied if the reserve equals half the LLC's capital and subject to the discretion of the shareholders).

Other amendments include those introduced under amendments to the Old Law, particularly: (i) board of managers/directors term expiry and extensions; and (ii) supervisory board formations (for LLCs with more than 15 shareholders).

(b) PJSCs

The New Law has enabled PJSCs to have more control over their initial public offering (IPO) process and structure through some additional and revised provisions, including the removal of thresholds (30 - 70%) on founders' subscription shares upon IPO (subject to the prospectus and SCA requirements).

Other revisions in the New Law include but are not limited to: (i) discounted share prices; (ii) a 10% limit of net profits for director's remuneration; (iii) less requirements to convert to a PJSC; and (iv) the option for longer subscription periods, so long as it does not exceed the longstop date specified in the prospectus.

Timeframes

Companies will have a year from its effect (i.e. 2 January 2023) to comply with any adjustments required to comply with the New Law. Therefore, it is important to ensure the requirements of the New Law are applied and reflected in the Memorandum of Association of such companies (if applicable).

Please reach out to a member of our UAE based corporate team for further information or if you require any advice/assistance with these matters.


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