Welcome changes: A new law is set to alter the structure of companies

In December 2011 the UAE Cabinet approved a new draft Commercial Companies Law that will replace the companies law that has been in place since 1984. Under development for several years, the new law as specified by the draft could spur investment in Abu Dhabi by making it easier to operate in the UAE and improving corporate governance. However, when it comes to perhaps the most heavily anticipated change – a loosening of foreign ownership restrictions – the draft did not raise the current limit of 49% that non-UAE nationals can currently hold. Nonetheless, it does contain a so-called enabling provision that would allow the cabinet to issue subsequent resolutions on this issue.

SHAREHOLDING: While much of the attention has focused on foreign ownership rules, the draft law introduces several other changes related to the structure of companies, including new shareholding rules. For example, sole shareholders will now be allowed for both limited liability companies (LLCs) and private joint stock companies (PrJSCs). Previously, LLCs required at least two founding members, and PrJSCs three. This welcome change will allow individuals to benefit from limited liability without having to take on a partner.

The new rules will help ensure the efficiency and integrity of a company’s management and board of directors, who will now legally be required to preserve the company’s rights and work faithfully for the benefit of the company. For example, a manager of an LLC will not able to able to undertake a deal that would result in increased competition for the company without the consent of the general assembly. Firms will also no longer be able to grant their directors exemption from the personal liability that they bear in their capacity as an officer of the company. Other changes include new rules regarding the composition of boards of directors, although this development is tied in part to the potential future loosening of foreign ownership regulations. That is, if non-UAE nationals are authorised to hold more than 49% of a company, then a majority of its board members can be non-nationals, as can the chairman. This could benefit firms by allowing them to draw upon a wider pool of potential officers.

FOREIGN OWNERSHIP: For more than 49% of a firm to be owned by a non-national, the present limit on foreign ownership will need to be raised. While the draft does not specify a new cap, it does provide a legal mechanism that would allow for this limit to be changed. At the request of the minister of economy, the cabinet may issue a resolution determining the forms of companies or classes of companies that may be held in full by a foreign national. The cabinet can also identify cases where a non-UAE national can hold more than 49%, but less than 100%, of the share capital.

Although the government has yet to identify what types of firms might qualify for the higher limits, the list is likely to include sectors that require substantial investment, such as technology, insurance, and research and development programmes, Jitendra Gianchandani, the chairman and managing partner of the business advisory Jitendra Consulting Group in Dubai, told local newspaper The National in December 2011. Alternatively, the cabinet could produce a “negative list”, with the law specifying that the cabinet be allowed to issue a resolution that identifies a class of activities limited to UAE nationals. This scheme is in use in some GCC countries, such as Saudi Arabia, where foreign ownership is limited in certain sectors such as defence.

While the draft law stops short of raising the foreign ownership limit, its eventual approval and implementation would likely benefit both the UAE and Abu Dhabi. The current companies law is nearly three decades old and was drafted when the legal system and economy of the UAE were less developed. Regarding foreign ownership, the draft law may be a mild disappointment to the investor community in the short run, but the consensus seems to be that the cabinet will issue additional resolutions on this topic – it is just a question of which sectors will be identified and when. However, the current draft law must first of all be approved by the Supreme Council, ratified and signed by the president.